For entrepreneurs, creditworthiness can be a critical factor when growing a business. The ability of a business owner to secure business credit cards, loans, and lines of credit with competitive interest rates, supplier credits, and insurance can all be impacted by their consumer and business credit. While businesses grow, their owner’s personal consumer credit is often leveraged to obtain funding, credit, or other debt. In addition, a business owner may be required to guarantee some forms of business credit using their personal consumer credit.
This article explores consumer and business credit, offering tips for leveraging both to maximize business sustainability.
Investopedia defines credit as “...a contractual agreement in which a borrower receives a sum of money or something else of value and commits to repaying the lender at a later date, typically with interest. Credit can also refer to the creditworthiness or credit history of an individual or a company.”
A business owner’s personal consumer credit is most significant in the beginning stages of a business. This is because early-stage businesses/start-ups do not have a credit history.
For items such as trade/supplier credits, loans, credit cards, and lines of credit, financial institutions/creditors will often rely on the owner’s consumer credit to issue debt to the business. Business owners can also be required to guarantee the business's obligations as a safeguard or collateral for credit issuers. Additionally, some insurance companies may review business owners’ personal consumer credit to determine their ability to make timely premium payments. As a business grows and establishes credit, financial institutions/creditors will rely less on the owner’s personal credit.
Examples of when business owner’s consumer credit is used:
In the mid-19th century, the credit rating system used in business today was created to monitor the creditworthiness of individuals and companies. In the 1950s, the credit rating industry began collecting detailed information about companies and individuals, including length of credit history, payment history, outstanding debts, and other financial data to approve debt. Industry leaders in this sector are Dun & Bradstreet, TransUnion, Equifax, and Experian.
A credit score is derived from a mathematical formula to determine a ranking. This ranking determines whether the business or individual has poor, fair, good, or excellent creditworthiness. For businesses, credit rankings vary by credit bureau and are explained below:
CONSUMER CREDIT (US):
Tips for maintaining a high consumer credit score:
Establishing business as a separate entity and creating a “corporate veil”:
Separate business bank account(s):
Business credit card:
Establishing trade credit with other businesses (B2B):
Keeping credit bureaus updated and running credit reports for business:
Maintaining favorable credit as a business owner can greatly improve a business’s ability to access much-needed capital as it grows. While personal consumer credit may be a factor in the early stages of a business, the eventual establishment of strong business credit can result in lower interest rates, favorable payment terms, attractiveness to investors, trade credits, and an overall positive reputation that will help the business grow.
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