Why Establish Business Credit?

There are many reasons it is vital for business owners to separate their personal credit from their business credit, including creating a profile that will enable them to access corporate credit opportunities with favorable terms, establishing positive vendor relationships, and obtaining improved insurance rates.

In order to establish a business credit profile, a company must be rated by a credit bureau that evaluates the credit worthiness of businesses. The primary credit rating provider for businesses is Dun & Bradstreet; however there are several other providers that are also providing these services. Unlike an individual’s personal credit score which is represented by a single FICO credit score, a company’s business credit is a more comprehensive evaluation of many facets of a company’s payment history and credit worthiness.

Instead of jeopardizing your personal credit and assets every time your company requires financing, you might be able to use the business’ credit rating to secure the financing you need with even more favorable terms and lower interest rates. For instance, an individual might pay up to 13% interest on a $100,000 line of credit whereas a business could qualify for an interest rate of 7%. That would save you almost $40,000 in interest alone.

Another benefit of business credit is establishing a financial record that potential vendors will look at to determine whether or not to do business with you. If your business has a positive credit history, this will encourage transactions with other companies. Since insurance companies often check business credit ratings before issuing a new policy, good corporate credit history can also lower your insurance premiums.

One of the many risks that business owners face is using their personal assets as collateral for a business transaction. If the business owner does not make wise financing choices, valuable items such as a car, house, or bank account can be vulnerable to creditors’ claims if the financing is not repaid.

You may be under the impression that if you are the owner of a corporation or a limited liability company (LLC) your personal assets are protected. In theory this is accurate, since most creditors can only satisfy their claims against a legitimate business entity through the assets of the corporation or LLC. For instance, if your corporation or LLC is involved in a lawsuit and loses, only corporate assets can be used to satisfy the judgment.

However, when it comes to financing, even if you have a corporation or LLC, your personal assets can still be vulnerable. Often times, a business owner is required to secure any financing loaned to the business by using personal assets as a guarantee. What this means is that the lender can seize the personal assets to satisfy the loan if the business fails to repay the loan. Therefore, a corporation or LLC protects an owner from lawsuits initiated by dissatisfied parties or injured customers, but it will not protect a business owner’s personal assets if these assets are part of an owner’s personal guarantee on a loan.

The good news is that personal vulnerability is not obligatory. Corporate or business borrowing is possible without the requirement of personal assets or a personal credit rating if a business has established its own credit history. We explain why it is so important to establish business credit and the difference between personal and business credit ratings as well as the intricacies of the credit rating process.