5 Costly Mistakes To Avoid When Building Business Credit
Building business credit is one of the most important steps small business owners can take to ensure long-term success. Good business credit can open doors to better funding options, lower interest rates, and increased trust with vendors and lenders. However, many small business owners make mistakes during the process that can negatively impact their credit score and ultimately hinder their growth.
Here are 5 costly mistakes to avoid when building business credit, along with actionable solutions to keep your finances on track.
1. Using Personal Credit Instead of Business Credit
One of the biggest mistakes entrepreneurs make is using their personal credit to fund their business. While it might seem easier at first, mixing personal and business finances can damage both your personal and business credit scores.
Why it’s a problem: Using personal credit can put your personal assets at risk if the business encounters financial difficulties. Additionally, relying on personal credit for business expenses doesn’t help build your business credit profile.
Solution:
Open a Business Credit Account: Apply for a business credit card or line of credit that reports to business credit bureaus (e.g., Dun & Bradstreet, Experian Business, Equifax Business).
Keep Finances Separate: Use your business credit exclusively for business expenses and keep personal finances separate. This way, you protect your personal credit score and start building your business’s financial credibility.
2. Making Late Payments
Another costly mistake is failing to make timely payments on business credit accounts. Late payments can have a severe impact on your credit score and can stay on your credit report for up to seven years.
Why it’s a problem: Late payments indicate to lenders that your business may struggle with financial responsibility, leading to higher interest rates, fewer funding options, and damaged trust from vendors.
Solution:
Set Up Automatic Payments: Automate your business credit card or loan payments to ensure they are made on time every month.
Monitor Your Bills: Use accounting software or set reminders to track payment due dates and avoid missing deadlines.
Negotiate Payment Terms: If cash flow is tight, consider negotiating more favorable payment terms with vendors, such as extending payment deadlines or requesting more flexibility.
3. Applying for Too Many Accounts at Once
While building business credit is important, applying for too many credit accounts at once can actually hurt your score. Each time you apply for credit, a hard inquiry is made, which temporarily lowers your credit score.
Why it’s a problem: Applying for numerous accounts within a short period can make your business appear desperate or financially unstable to lenders. It can also create a negative impact on your credit score if too many inquiries are made in a short amount of time.
Solution:
Be Strategic in Your Applications: Before applying for a new credit account, assess the need for it. Focus on building relationships with a few trusted vendors and gradually increase credit limits over time.
Space Out Applications: If you need multiple lines of credit, apply for them gradually (e.g., once every few months) to avoid multiple hard inquiries within a short period.
Check Prequalification: Many lenders offer prequalification checks that don’t affect your credit score, allowing you to assess your chances of approval before submitting an application.
4. Ignoring Your Business Credit Reports
Just like your personal credit score, your business credit score is a reflection of your financial behavior. Ignoring your credit report can result in missed errors or inaccuracies that could damage your business’s creditworthiness.
Why it’s a problem: Errors in your credit report, such as incorrect account information or missed payments, can negatively impact your credit score, even if you’ve been diligent with your payments.
Solution:
Monitor Your Credit Regularly: Regularly check your business credit reports from the major credit bureaus (Dun & Bradstreet, Experian Business, Equifax Business) to ensure accuracy.
Dispute Inaccuracies: If you find any errors on your report, dispute them promptly with the credit bureau to have them corrected.
5. Overextending Credit and Not Managing Debt
While using credit is essential to building your business credit, overextending credit or accumulating too much debt can hurt your credit score and cause financial strain on your business.
Why it’s a problem: Maxing out credit cards or taking on too much debt can hurt your credit utilization ratio, which is a major factor in determining your business credit score. High credit utilization may signal to lenders that your business is struggling to manage debt.
Solution:
Keep Credit Utilization Low: Aim to keep your business credit utilization rate below 30%. This means if you have a $10,000 credit limit, try to keep your balance under $3,000.
Pay Off Debt Regularly: Pay off your business credit balances as much as possible each month to maintain a healthy credit utilization rate and avoid paying high interest.
Create a Debt Management Plan: If your business is carrying multiple debts, develop a plan to pay them off efficiently. Consider consolidating debts to secure better terms and lower interest rates.
Building business credit is a marathon, not a sprint. By avoiding these costly mistakes and implementing the suggested solutions, you’ll be on your way to establishing a strong credit profile that opens doors to more funding and greater financial opportunities for your business.
Start by separating personal and business finances, making on-time payments, and managing your credit responsibly. Regularly monitor your credit reports and don’t overextend your business with unnecessary debt. In time, your business credit will become a powerful tool that helps your business grow and succeed.
About GreenStreet 360
GreenStreet 360 is a business growth and business solutions company that specializes in helping small businesses owners to set their business foundation, build business credit, gain access to business funding and earn referral income as they grow.
