Home Business Insights & Advice Importance of credit for your start-up business: Things you should know

Importance of credit for your start-up business: Things you should know

by John Saunders
8th Apr 22 11:40 am

What’s the dream of every start-up business? To have financial power! But unfortunately, the one thing they desire is usually the hardest to get their hands on. Good news! Good credit can help you change the entire situation.

Using a secured credit card Canada, you can have profitable access to credit, benefiting your business. In fact, it can push your start-up to do business with other companies and make even more money.

Yes, credit is that important for your business! Are you not convinced? Well, you’ll be after reading this guide.

Understanding the credit

When starting a new business from rock bottom, you need to make endless financial decisions. And, having freedom of credit in such times can prove to be your growth lifeline. In addition, it can give you access to:

  • Continue daily expenses with credit offers
  • Hire experts and additional staff to run business
  • Conserve, manage, and moderate cash flow
  • Expand capital to grow business

It allows an owner to be free and use the money wisely for promoting and running his business. Surely, these are what you are focusing on in your start-up days.

Business line of credit

It is a financing option provided to the business owner in which a lender grants the business access to a predetermined credit limit. A credit line allows you to:

  • Borrow the amounts you require
  • Repay what you can
  • Re-borrow up to the limit

Thus, providing business flexibility to function. It is a kind of loan that allows businesses to continue production and meet short-term financial goals. However, there are some terms to it that we’ll discuss later in the section.

Now the question arises if there’s a special line of credit for business? Or is it the same as having good personal credit?

How are business LOC and credit related

As we discussed, a business line of credit is a type of loan with some specific requirements and terms. And that we all know how important a good credit score is to qualify and get a loan.

So, if your start-up needs to have a business LOC, you first need to work on building and rebuilding your business credit score. This is the only way to get financial freedom without falling deep into credit and business debts.

Is credit important for start-ups

As a start-up business owner, you must be looking for ways to create, invent, and grab capital and funding opportunities. But, have you ever wondered if there’s something that can work like magic to boost your business? Yes, that’s business credit for you people.

As a start-up, your cash flow is critical. Thus having a solid company credit score is essential for obtaining competitive business loan rates and terms from potential investors.

What is a business credit score

Business credit is a notion that is frequently disregarded, but its significance should not be overlooked. Recognising your business credit, especially for small to medium businesses (SMEs) or start-ups, could be the financial genie you need in the long run.

Your company’s credit score is a reflection of its probable reliability in terms of satisfying financial obligations. It’s simply a guide to how reliable, stable, and prosperous you are as a business partner.

Whether you’re applying for a loan or corporations are giving credit to you, your credit score could determine whether you get approved or not. Several elements decide your business credit score; here are a few of the most important ones to consider:

  • Business activity/production
  • Company size
  • Payment record and history
  • Date of business incorporation
  • Length of stable credit history
  • Business growth and revenue
  • External risks
  • Profit to loss ratio
  • Country of business incorporation

According to Equifax, a business credit report can set a trustworthy standard for start-ups, attracting new supplies, investors, and customers.

How is business credit important

A credit report is a detailed account of your financial record, including your credit score. It is one of the most important documents that lenders evaluate to assess whether or not you qualify for a business loan. The report includes all the forms of judgments that can affect your trustworthiness. Some of them are:

  • Your residence
  • SIN
  • Past financial history (with other creditors)
  • Bankruptcy record

The reasons why your business credit score is an important asset for your start-up lie within your credit score and report. For instance, it includes your business information, credit score details, payment summary, and everything that a lender wants to see. So, if it’s not on par, you can imagine what will happen to the chances of your loan approval and investment deals.

Moreover, business credit scores and reports are comparatively more complex than personal credit scores and reports. So, can it have an impact on your business economy? Conversely, can your bad credit work against you? Let’s find out!

Can credit impact your business

Yes, it definitely can! If you need financing for a place, supplies, and equipment, you can get them at affordable rates with good credit. That’s how important it is. However, if your personal or business credit score isn’t in a worthy range, things might become difficult for you.

  • Your personal credit score is crucial for your non-registered business or any side hustle you have as a home-based business
  • Your business credit score is vital for your registered start-ups to get a separate rental (or personal) space, employees, supplies, etc.

The point to understand is that whatever business type you own, your credit score can really impact your funding and trust value. Driven explains some reasons why it is important to have a good business credit score:

1. Quick financing

Having good business credit is advantageous when seeking business loans to handle cash flow concerns quickly. In addition, when you apply for external finance solutions, lenders may look at your company’s credit score.

So, a good business credit score will help you get approved for small business loans, business lines of credit, and other types of business finance.

A strong business credit score shows your lender that you will pay your bills and make payments on time, which will help you qualify faster and get approval more easily. In addition, if your company credit score is good enough, you may be eligible for lower interest and premium rates on the loan you applied for, depending on the lender.

2. Negotiable terms

Your business credit score is useful in more ways than one when dealing with banks, loan providers, or lenders. A good company credit score can also assist you in obtaining trade credit, financing, and better payment terms from vendors.

They’ll consider you a trustworthy client if you have a good business credit score, and you’ll be able to get more flexible repayment terms. In addition, you can use the funds to:

  • Buy supplies
  • Stock up goods
  • Get necessary equipment

Or make other large financial decisions for your business. Choosing the correct supplier for your company can also help you achieve favorable loan payment terms that meet your requirements and affordability.

3. Personal credit security

Your good business credit score can be a perfect way to protect your personal credit score. Personal credit is also protected by having good business credit. As a general rule, personal credit should not be used for company expenses or purchases.

Using your personal credit card for major business costs will raise your credit utilisation ratio, evaluating how much credit you’re using compared to your credit limit. Your personal credit score will suffer if you have a high credit utilisation rate.

  • According to DNB, having a separate business credit account will ensure your personal credit isn’t hurt in any case
  • As a start-up, you can get funding based on your personal credit, and later on, when your business has grown or is still in the initial stages, immediately create a separate business account

The key is to start working on building your credit score right from the start, so there’s never a conflict entangling your personal and professional credit history.

How to build good business credit

Do you need to build your business credit if your personal credit looks just fine? Well, if you don’t want to lose the liability and all your personal assets, then yes, you must work on building your business credit score. Moreover, it can unwind hidden ways that can otherwise be good to bring finance to your company. The better your score, the better your chances to attract lenders and investors.

So, let’s read breakdown tips by business news daily on how you can build your business credit score for the benefit of your start-up:

1. Go public

The first thing you should be doing is put your business out there for people to see and come by. Yes, even if you own a home-based area, you can get a phone number specifically for business inquiries.

  • For people to reach you professionally, you have to make your business public
  • You can create a user-friendly and simple business website with essential details of your business and the product you sell

Of course, you need to open a dedicated business account, but all can go in vain if your business isn’t known or has a good reputation around the area.

2. Incorporated all the way

To build business credit, you need to have a business account. But, even more than that, you must be able to keep things separate, personally and professionally. So, for this purpose, registering your business, getting a business identification number, and opening a business account is vital.

Once you have all the setup ready, you’ll be relaxed as your business account won’t mingle with your personal account, which is necessary to build a good credit score.

3. Earn vendor’s trust

The finance market is full of competitors who always work on scoring a big deal. And, yes, that includes everyone who’s selling the same products as you. So what can make your business a highlight among the applicants? Yes, your good business credit score!

  • If your business score is good despite all the money shortage, your vendor might supply you with the material without demanding the prepayment
  • Earning the vendor’s trust can help you in bagging deals that can otherwise become difficult

Moreover, if you have trustworthiness, your vendors might report the successful payments and loans to the credit bureaus, thus helping you build a score.

Bonus: Click to read a start-up funding book to know how to earn investors’ trust.

4. Pay early and whenever you can

Although it’s an unsaid rule, most start-ups forget to follow it. And then what happens? Right when they’re sailing their boat to dive into the sea of finance, the debt and loan payments restrict their journey. So they have to clear the way or, in other words, have to start from the bottom again. Yes, the reason why the majority of the start-ups spend a huge amount of time in the small company phase.

So, if you want to become a medium-size company in minimum time, focus on paying your payments on time. The key is to keep paying as much as possible to maintain the funding and cash flow.

Bottom line

A credit score is an important part of your financial journey, whether for your personal goals or professional aims. Understanding a business credit score is necessary to know how you can take advantage of it. Surely, better loan terms, low-interest rates, quicker and guaranteed approvals are only some of the perks of having a good credit score.

So, what’s really stopping you from having that financial freedom for your business?

Probably the lack of knowledge of where you should start your good credit journey to take your business to another level. Don’t worry! We are here to take the initial step. We have curated this guide with all the basics of a business credit score which a start-up business owner must know. Give the comprehensive study a read and understand why credit is important for your business.

 

The above information does not constitute any form of advice or recommendation by London Loves Business and is not intended to be relied upon by users in making (or refraining from making) any finance decisions. Appropriate independent advice should be obtained before making any such decision. London Loves Business bears no responsibility for any gains or losses.

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