There are a ton of myths out there related to both personal credit and business credit.  Credit myths have been around for as long as the idea of credit itself.  Knowing what’s real and what’s not can make all the difference in how you are able to run your business. 

These Credit Myths Aren’t What They Appear

We’ve all heard these credit myths.  Even if we haven’t, it’s likely we’ve believed them without knowing why.  While there are plenty more out there, here are some of the most common, and the truth about what you really need to know. 

Credit Myths Debunked: Personal Credit Is All You Need to Run a Business

The smidge of truth behind this is, you actually can run a business on your personal credit alone.  Many a business owner has done it.  Most, however, would agree it isn’t ideal.  In fact, I’d say it’s likely if they had known about business credit earlier, they wouldn’t even have attempted it. If your business goes bankrupt you could lose your house and your car.   Since, according to Forbes, at least 70% of small businesses do not make it even 10 years, it’s a terrible idea to fund your business with your personal credit only. 

Is There Even Such a Thing as Business Credit? 

 The answer is, yes.  There is absolutely such a thing as business credit.   It is credit based solely on the merits of your business’s ability to repay business debt.  It is totally separate from personal credit. When set up properly, the accounts that report to your business credit do not affect your personal credit, and vice versa. 

Check out our best webinar with its trustworthy list of seven vendors to help you build business credit.

Why Do You Need Business Credit? 

First, if your business goes south and you are not able to make good on your business accounts, your personal credit will not suffer.  You will still be able to buy a home or car without the fear of your business troubles affecting it. 

Consequently, if your personal credit takes a dive, you will still be able to get the funding you need for your business.   That’s not all though.  Even if you make your payments as you should, running a business on personal credit can cause problems. 

Part of what makes up your personal credit score is the debt-to-credit ratio.  This is how much of your available credit you are using versus how much total credit you have available to you.  The higher this ratio is, the lower your credit score.  So, if you have $10,000 in available credit, but you have a balance on your cards totaling $8,000, your debt to credit ratio is .8.  However, if your total balance is $2,000, your debt to credit ratio is .2.  That looks a lot better to lenders. 

Now, considering that business accounts are typically much larger than personal accounts, if you are funding them with personal credit you are much more likely to stay at or near your total credit limit.  That means, even if you are regularly paying off your balance, you are likely going to keep a debt to credit ratio near 1, resulting in a lower personal credit score. 

How Does Business Credit Help?

Business credit limits are typically much higher than personal credit limits.  In addition, the debt to credit ratio does not really affect business credit scores the same way it does personal credit scores.  Therefore, if you establish separate business credit for your business, you can protect your personal credit from your business expenses and more efficiently fund your business. 

Credit Myths Debunked: Personal Credit Doesn’t Affect Your Ability to Get Business FundingCredit Score Myths Credit Suite

On the flip side, you shouldn’t think that your personal credit cannot affect your ability to get business funding at all.  While, in the strictest sense it does not affect your business credit report or score, it can still have an impact on your lender’s overall funding decision.  

ome business credit reporting agencies use your personal credit in the calculation of your business credit score.  Sometimes, if a business hasn’t been around long enough, a combined personal and business credit report will be issued. 

For many lenders, personal credit score is a key piece of overall fundability. This is the total ability of a business to handle all debts.  It is a puzzle made of many pieces, and while business credit is the largest piece, personal credit still has its place.  So, don’t think if you have business credit that personal credit doesn’t matter.  You can’t just ignore it. 

Credit Myths Debunked: Business Credit is All that Matters When Funding a Business

Not only does personal credit have an impact on overall fundability, but so do a number of other things.  In addition to business credit and personal credit, your business’s overall fundability is affected by the following things. 

How Your Business is Set Up

The way your business is set up can affect fundability.  Consider the following: 

  • Contact Information

Does your business have its own phone number and address?  It should. 

  • EIN

Do you have an EIN for your business?   This is an identifying number for your business that works in a way similar to how your SSN works for you personally.  You can get one for free from the IRS.

  • Incorporate

Incorporating your business as an LLC, S-corp, or corporation is necessary to fundability.  It lends credence to your business as one that is legitimate. It also offers some protection from liability. It also truly separates your business from you and your personal assets.

  • Business Bank Account

You have to open a separate, dedicated business bank account.  There are many reasons for this, but for fundability you need to know two things.  First, it helps establish your business as an entity separate from you the owner.  Next, time in business matters to lenders.  Many lenders consider the date the business bank account was opened to be the start of business. 

Another thing to consider is, you cannot get a merchant account without a business bank account.  Without a merchant account you cannot accept credit card payments.  Since studies show people are much more likely to spend if they can use a credit card, you need to be able to accept them as a form of payment. 

Check out our best webinar with its trustworthy list of seven vendors to help you build business credit

  • Licenses

For a business to be legitimate it has to have all of the necessary licenses it needs to run.  If it doesn’t, red flags are going to fly up all over the place.  Do the research you need to do to ensure you have all of the licenses necessary to legitimately run your business at the federal, state, and local levels. 

  • Website

These days, you do not exist if you do not have a website.  However, having a poorly put together website can be even worse.  It is the first impression you make on many. If it appears to be unprofessional, it will not bode well for you with consumers or potential lenders. 

Business Information

On the surface, it seems obvious that all of your business information should be the same across the board everywhere you use it.  However, when you start changing things up like adding a business phone number and address or incorporating, you may find that some things slip through the cracks. Non-uniform business information can cause fraud concerns. 

Other Business Data Agencies 

In addition to the business credit reporting agencies that directly calculate and issue credit reports, there are other business data agencies that affect those reports indirectly.  Two examples of this are LexisNexis and The Small Business Finance Exchange. These two agencies gather data from a variety of sources, including public records.  

The Application Process

Even the application process can affect overall fundability.  First, consider the timing of the application.  Is your business currently fundable?  If not, do some work first to increase fundability.  Next, ensure that your business name, business address, and ownership status are all verifiable.  Lenders will check into it.  Lastly, make sure you choose the right lending product for your business and your needs.  Do you need a traditional loan or a line of credit?  Would a working capital loan or expansion loan work best for your needs?  Choosing the right product to apply for can make all the difference. 

So, while it is true that business credit is a big part of what lenders look at when it comes to approving funding, maybe even the biggest part, there is more to it. 

Check out our best webinar with its trustworthy list of seven vendors to help you build business credit.

Credit Myths Debunked: You Must Have Credit to Get Credit

This is true in a sense.  We’ve all heard and even seen it. You apply for financing but are turned down because you don’t have any credit.  But, how do you ever build credit without getting credit?  There’s a trick that few know, and it’s called starter vendors

These are vendors that will issue net terms on invoices without a credit check. Then, they will report your payments on those invoices to the business credit reporting agencies.  As a result, your business credit score starts to grow and you can eventually apply for types of financing. 

Credit Myths Debunked: Making Payments on Time is All that Matters

Of course, making payments on time definitely matters.  If you do not make payments on-time, there isn’t much you can do other than to start making them on time.  However, you can make every payment on time, and if your overall fundability isn’t in order you may still get denied. 

For example, if all of your business information isn’t uniform across the board, a lender may deny your application due to fraud concerns.  If your business doesn’t have its own contact information or separate bank account, a lender may not take it seriously as a legitimate business.  When it comes to fundability and getting approval for financing, everything counts. 

Don’t Let These Credit Myths Keep You from Getting Funding for Your Business

There are other credit score myths out there, but these seem to be some of the most common misconceptions about credit.  Don’t let them keep you from getting the funding you need to run and grow your business.  Do your own research. Understand where you are in terms of fundability. Then, you can give yourself the best chance as approval for whatever type of funding you need. 

 

The post 5 Credit Myths Debunked appeared first on Credit Suite.