Warren Buffett said, “Only when the tide goes out do you discover who’s been swimming naked.” His point: extend yourself at your own peril.
Business is an intellectual sport and not an emotional one. Before we get into the differences between business and personal credit, or when it might be better to utilize one over the other, ask yourself, “Am I extending myself?” What assumptions are you making? Where are you feeling optimistic? To make good decisions, you have to ask yourself great questions.
You don’t want to get caught swimming naked when the tide goes out.
Now, Let’s Get Personal about Your Personal Credit
How long did it take you to establish your personal credit? Years? Some of you have maybe even destroyed your personal credit already during your business adventures. The point is that you weren’t born with a credit score–you had to establish one. You borrowed here, signed there, and *bam!* you have a credit score. Let’s ask you a question: Did someone show up on your 16th birthday and say “Want a Mercedes? Just sign here, kid, and it’s yours! We know you’re good for the money!”
No. That never happened.
Over time, you proved you were trustworthy, and you built the ‘credit’ of your own name.
In case you didn’t know, 5 factors make up your credit score:
- Payment History: This is a biggie—making your payments on time.
- Credit Utilization: Do you use less than half of the credit available to you?
- Length of Credit: Did you have a Diners Club card? Yeah, you’ve had credit for a long time.
- Recent Credit: Did you just get approved recently? Pump the brakes on this guy.
- Credit Mix: Credit cards, houses, cars, bling bling!
Odds are that events popped up in your life and these categories established themselves naturally. If you want to change these indicators, you should consider some of the top ways to increase your credit score.
I’ve spent your life establishing your personal credit, and now you want to establish business credit. Guess what? No one is going to step in front of you on the 4th birthday of your business and say “Want $100,000 cash? Just sign here with your business name and it’s yours! We know you’re good for the money!”
No. That never happens either.
When It Comes to Business Credit, Your Business Is a ‘Person’ Too
Establishing business credit takes time, just like it did for you to establish personal credit. You might need to take higher risk loans, higher interest lines of credit, or payment terms that aren’t spectacular at first.
To build a strong business credit report, you generally want several vendor accounts, a few revolving accounts (or business credit cards), and 1 or 2 bank loans–all in the name of the business. Unlike your personal credit, your business credit score is calculated a little differently. Your payment history is still king, but the length of time you’ve been in business is very important too.
If you can pay your obligations before they are due, you’ll likely qualify for more credit, faster.
Dun & Bradstreet is the big player in this space. They are your big brother when it comes to your business credit. D&B is the largest, but there are also Experian Business and Equifax Business. Dun & Bradstreet uses the Paydex score to determine your creditworthiness. To see if you already have a DUNS number you’ll want to check their website.
Establishing Vendor Accounts
Vendor accounts are commonly suppliers used for the operation of your business. It can sometimes take a few payment cycles before it starts building your business credit score. If asked for your SSN on the application, include your DUNS number and EIN instead. Vendor accounts usually have a fixed payment term, like a NET 30, 60, or 90, and the entire balance is due within that specified number of days.
- HD Supply
Establishing Revolving Accounts
Revolving accounts are similar to your personal credit cards, in which you have a credit limit and can pay a minimum amount each month. Unlike vendor accounts, the entire balance isn’t due within a short number of days. Generally, you want to establish some vendor accounts before you apply for revolving accounts.
Revolving account examples:
From here, you can go on to establish business loans and business credit cards, all on top of a solid foundation.
Don’t Forget–The Tide Always Goes Out
Once you’ve established business credit, just like personal credit, it’s easy to start getting comfortable. Before possibly over-extending yourself and putting a drain on the profit of your business, ask yourself good questions. Ask if this investment has a clear path to profitability. How much money will this investment need to make in revenue to pay back the loan and interest before returning a profit?
When it comes to making decisions about your business credit, don’t forget to make sure you’re covered in case the tide goes out. Unless you want to risk overexposure!