A business’s credit rating is one of its most valuable intangible assets. Solid credit paves the way for expansion, lends crucial financial flexibility, and builds a business’s value, should the business owner ever decide to make an exit. Small-business owners who are not careful with their business credit rating run the risk of ruining it. What are some common business credit mistakes that must be avoided, in order to build and maintain excellent business credit?
Just Use Your Personal Credit
Using personal credit to finance a business’s startup seems to make sense for a lot of entrepreneurs. After all, they already have access to financing under their own names, with no application process, and no need to build a business credit rating. But, as long as business owners keep relying on their personal credit to finance business expenditures, they will never have an opportunity to build business credit. Not only that, but chances are good that they will damage their personal credit ratings in the process.
Stick With the Sole Proprietorship
Sole proprietorships are easy and inexpensive to start and maintain, but they are not legally considered to be separate from their owners. Thus, they have no capacity for building business credit. In the event that the business goes belly-up, the business owner may be stuck paying off business debts, with no business to help them do so. In contrast, corporations and LLCs exist as distinct legal entities, and debts incurred under their names remain the sole responsibility of the businesses, shielding the business owner from personal liability.
Pay Whenever It’s Convenient
Some business owners are rather lackadaisical when it comes to making payments on their credit cards, loans, utilities, and vendor accounts. They might reason that as long as they’re not sent to collections, they are in the clear. But, taking this attitude toward paying bills is very shortsighted. Sure, it might make it easier to manage cash flow in the short term, but it ruins the PAYDEX Score, a key metric used by lenders.
Don’t Worry About Monitoring
Small-business owners who have built a solid credit rating may develop a false sense of security, and neglect to monitor their business credit. Those who own new businesses might think that until they have good credit, there is no need to keep tabs on it. The problem is, business credit can change in a hurry, due to fraud, reporting errors, or any number of other mishaps. That’s why business credit monitoring is essential.