Building business credit has been one of the most popular talking points on social media this year. There are several reasons why this topic is so popular, but the two most common ones are building business credit can help you get loans as well as improve your business credit score.
There are several ways to build business credit, but one of the most common is by using a business credit card. This method is popular because it’s an easy way to start building credit and it doesn’t require any collateral. You can also get business lines of credit and loans from some lenders, but these usually require collateral.
Building business credit can be a great way to get the financing you need to grow your business. It can also help you improve your business credit score, which can make it easier to get loans in the future. With that being said, there are pros and cons to consider. Business credit can help scale your business, but if we aren’t responsible enough the mistakes can be very costly. Here are a few mistakes to avoid when considering building business credit.
1. Not establishing business credit early on
One of the biggest mistakes you can make when building business credit is not establishing credit early on. This can have several negative consequences down the road. One of those consequences is having difficulty qualifying for loans and lines of credit. Lenders will often look at your business credit history when considering your loan application. If you don’t have a history of borrowing and repaying on time, you may have a harder time qualifying for the financing you need.
In addition to having difficulty qualifying, if you are approved you could end up with higher interest rates. Interest rates on business loans and lines of credit are typically based in part on your creditworthiness. If you don’t have a strong business credit history, you may end up paying higher interest rates, which can eat into your profits. Another reason why not establishing credit for your company early on is a mistake to avoid is that if you don’t have a good business credit history, you may not have many options when it comes to borrowing. This can make it difficult to get the financing you need to grow your business.
2. Relying too much on personal credit
When I first started investing in my company, I used my personal credit. If I had to do it over again. I wouldn’t have. If your business is not generating income just yet be very careful how much you are putting on your personal credit card. It’s essential to make it a habit to pay off our card balances each month. Carrying a balance adds up and with the rise of interest rates, the decision to carry debt will be costly. When you rely too much on your credit, you’re putting your finances at risk. If your business hits a rough patch, you could end up facing financial difficulties yourself.Â
Additionally, relying too much on personal credit can make it more difficult to obtain business financing in the future. Lenders will be more likely to view you as a high-risk borrower if they see that you’re relying heavily on personal credit. As a result, you may have a harder time qualifying for business loans or lines of credit down the road. If your credit is pulled due to not having any credit history the lender will see that you may not be able to pay back the money owed.
3. Not monitoring business credit reports regularly
Not monitoring business credit reports regularly is one mistake many entrepreneurs make when building business credit. This can lead to problems down the line, as creditors may not be aware of changes in your creditworthiness. By staying on top of your business credit reports, you can avoid these problems and keep your business credit score healthy. Also, by monitoring your credit score you can check for errors and have them corrected. This is important because inaccuracies can lower your score and make it more difficult to get credit in the future. So, if you’re building business credit, be sure to monitor your reports regularly. It’s the best way to keep your business credit score healthy and avoid problems down the line.
4. Applying for too many credit products at once
There are a few key reasons why applying for too many credit products at once can be detrimental when building business credit. First, it can create an appearance of financial instability. Lenders like to see that borrowers can manage their debts responsibly and applying for multiple credit products in a short period can give the opposite impression. That’s why it’s important to avoid applying for too many credit products at once. This can harm your credit score and make it more difficult to get approved for new lines of credit in the future.
Instead of applying for too many credit products at once, try building up your credit with one or two products first and then expand as needed. This will give lenders a better idea of your financial stability and improve your chances of getting approved for new lines.
5. Failing to keep track of business expenses
One of the biggest mistakes I made early on was not keeping track of my expenses. I would wait until December right before Christmas and try to find receipts and invoices. Failing to keep track of business expenses is a costly mistake. Not knowing how much money you’re spending can lead to overspending and getting into debt. It also makes it difficult to track your progress and measure your success. Keeping track of your business expenses will help you stay on budget and make smart financial decisions.
6. Not having a clear financial plan
When building credit for your company, it’s important to have a clear financial plan in place. Without a plan, it can be difficult to track your spending and income, which can lead to problems down the road. Additionally, without a clear plan, you may be more likely to make impulse purchases that can sabotage your efforts to build credit. Creating and following a budget will help you stay on track as you work to build your business credit.Â
We can create a clear financial plan by :
– Tracking our spending and income
– Creating a budget
– Making smart financial decisions
If we don’t have a clear financial plan in place, we may:
– Make impulse purchases that can damage our credit score
– Struggle to keep track of our spending and income
– Have difficulty building credit over time.
Creating and following a budget is the best way to stay on track while building business credit. By tracking our spending and income, we can make smart financial decisions that will help us build credit and avoid debt.
7. Not knowing the difference between business and personal credit
When building business credit, it’s important to understand the difference between business and personal credit. Many people make the mistake of using personal credit for their business, but this can hurt your business credit score. Business credit is based on your company’s financial history, not your personal credit history. This means that if you have a good personal credit score, it does not guarantee you a good business credit score. Similarly, if you have bad personal credit, it does not mean your business credit will be bad. It’s important to understand the difference between the two types of credit so you can make the best decisions for your business.
8. Using personal assets as collateral for business loans
When building business credit, it’s important to avoid using personal assets as collateral for business loans. This can be a mistake for several reasons. First, if the business loan goes into default, the lender can seize your assets to recoup their losses. This can put your finances at risk and damage your credit score.
Second, using personal assets as collateral can make it more difficult to obtain future business financing. Lenders may be hesitant to lend to you if they see that you’re willing to put your finances at risk to finance your business.
Finally, using personal assets as collateral can also limit the amount of money you can borrow. Lenders may only be willing to lend a certain amount of money if they know that they have your assets to fall back on.
For these reasons, it’s important to avoid using personal assets as collateral when building business credit. Instead, try to obtain business financing from other sources, such as business credit cards or lines of credit.
9. Guaranteeing business debt with personal assets
Many small business owners make the mistake of guaranteeing business debt with their assets. This can be a costly mistake, as it can put your assets at risk if the business is unable to repay the debt. Additionally, it can damage your credit score if the company defaults on the debt. If you’re looking to build business credit, it’s important to avoid this mistake. Instead, focus on building up the business’s credit history and reputation. This will help you get access to better financing options in the future and protect your assets.
There are a few reasons why this is not a good idea:
1) It can damage your credit score.
2) It can put your assets at risk.
3) It can make it difficult to get new financing for your business in the future.
4) It can create problems if you decide to sell your business.
5) It can be a costly mistake if the business is unable to repay the debt.
If you’re thinking about guaranteeing business debt with your assets, it’s important to weigh the risks and benefits carefully. You should always speak with a financial advisor to get guidance on what is best for your specific situation.
10. Borrowing from family and friends
When you’re just starting in business, it can be tempting to borrow money from friends or family members. After all, they’re usually more than willing to help out, and you may not have any other sources of financing available.
However, borrowing from family and friends is generally not a good idea. Here’s why:
1. It can put a strain on your relationships.
If you borrow money from someone you’re close to, it can put a lot of stress on your relationship. You may feel like you owe them something, which can be difficult to repay. What’s more, if you can’t repay the loan, it could damage your relationship.
2. You may not be able to repay the loan.
If your business isn’t doing well, you may not be able to repay the loan. This could put even more strain on your relationship with the person you borrowed from.
3. It can be difficult to get a loan from a bank if you’ve already borrowed from family or friends.
If you’ve already borrowed money from your family or friends, it may be more difficult to get a loan from a bank. This is because banks may see you as a higher-risk borrower.
4. You may have to give up equity in your business.
If you’re borrowing money from friends or family, they may want a stake in your business. This means giving up some ownership and control of your company.
5. You may have to pay interest on the loan.
If you’re borrowing from friends or family, they may charge you interest on the loan. This can add to the cost of the loan and make it more difficult to repay.
In general, it’s best to avoid borrowing from family and friends when you’re building business credit. There are other sources of financing available, such as business loans from banks and small business grants. These loans may have lower interest rates and better terms than loans from family and friends.
11. Taking on too much debt
There’s a difference between good debt and bad debt. However, when we take on too much debt and don’t have the income to pay it down. It can create problems for our business. Some business owners use debt to finance their business growth. However, taking on too much debt can jeopardize the future of your business. If you default on your loan payments, it could damage your business credit score and make it difficult to get financing in the future. It’s important to only take on as much debt as you can afford to repay. Don’t overextend yourself financially and put your business at risk.
12. Defaulting on a loan
Defaulting on a loan is a mistake that can have serious consequences for your business credit. When you default on a loan, it means that you have failed to make the required payments on time. This can lead to late fees, higher interest rates, and damage to your credit score. Defaulting on a loan can also make it difficult to get new loans in the future. Lenders will be less likely to approve your loan applications if they see that you have a history of defaulting on your loans. If you’re having trouble making your loan payments, it’s important to contact your lender as soon as possible to discuss your options. Defaulting on a loan is a serious matter that should be avoided if at all possible.
In summary
To start building business credit, avoid making these mistakes. Do your research and get organized. Make sure you keep good records and establish a positive payment history with creditors. By following these simple steps, you’ll be on your way to establishing solid business credit that will help support the growth of your company. Have you had any experience building business credit? Let us know in the comments below! Check out my other blog 10 ways to start the building business credit process