Top 7 reasons why companies need business credit 

Very few businesses can launch, grow or sustain lean periods without some form of financing. The availability of suitable funding will, to a significant extent, be determined by the business’ credit score which tells lenders, suppliers and other interested parties whether your business is a good financial risk. The business’ credit file will also show any signs of issues such as late payments or CCJs that could impact on any potential lending decisions.

As such, it is essential to ensure that your business credit profile is kept in good order and seeking funding may very well be a component in achieving this in certain circumstances. 

Here are seven reasons as to why companies need business credit.

1. Separation of personal and business credit scores and profiles

A significant percentage of small business owners apply for a credit card for personal use, only to then use it to pay for business purchases, thereby blurring the lines of demarcation between business and personal expenses. However, ensuring that your personal and business finances are entirely separate will enable you to protect yourself and, indeed, your business. If you haven’t already done so, you should apply for a business bank account for business payments.

By establishing a line of credit in the name of your company, you prevent your personal credit score impacting upon your business and create a clear distinction between your personal credit score and profile and that of your business. Once the business has one or more credit accounts and demonstrates responsible management and on-time repayment, future lenders, investors and other parties will become far less interested in your own personal credit score. 

2. Obtaining capital for expansion

Building credit as a business is important, as credit reports play a key role in obtaining capital to ensure the growth of your business. With a good business credit score, lenders and banks will be more inclined to advance your company funds or lines of credit. Your business will be able to access larger loans at lower interest rates because lenders will see you as financially reliable and therefore a good risk. Responsible credit management is vital in growing your business and its credit rating.

3. Reducing your expenses

A business with a strong credit rating is in a good position to negotiate terms with lenders and suppliers. Using your business rating, you can influence and reduce financing costs, rental terms, insurance premiums, supplier terms and credit card rates. Reducing these costs will lessen overheads and costs for your business, making your company more viable and increasing profitability.

4. Increasing the value of your company

Business credit is by no means merely an operational consideration. You may wish to sell your business or expand by attracting inward investment from other, larger companies. Business credit is fully transferable and can benefit the new owners if you decide to exit. Your efforts to build business credit will reward you in the future.

5. Gaining access to lenders

Lenders are keener to enter into financial transactions with businesses with an established history of reliable payments. A strong credit history will establish your business’s financial health and create an identity. With a credit identity, you will gain better access to higher quality lenders with more favourable interest rates.

6. Providing for the unforeseen

Lenders really only want to work with businesses where they will see a guaranteed return for their money. When your business needs to grow or to apply for an emergency loan, an established credit history will speed you through the approval process.

7. Improving financial security

An extension to the previous point, a business doesn’t always need to procure extra funds. Nor does it necessary expect to face any terrible emergencies. However, any business can hit a bad patch. You may find yourself needing funds to cover rent or to cover pay for your staff. Good business credit confers the ability to borrow with relative ease or to negotiate with suppliers and other parties in the event of a short-term cash flow issue.

Access to a decent line of credit is a lifeline for a small business just starting out. With it, you can cover sudden expenses, purchase stock, hire staff, and keep cash to cover other operational costs.

Building business credit is just as important as marketing or building good customer relationships. Any company that you deal with on a business-to-business basis may rely upon your business credit to determine how trustworthy and reliable your business really is. As we have seen above, there are numerous compelling reasons to focus upon business credit in ensuring the longer-term success of your enterprise.

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