The 5 Worst Mistakes To Make While Building Business Credit

Navigating the complex world of business credit is a vital skill for any entrepreneur. The decisions you make early on can significantly influence the growth and financial health of your company. While many mistakes can be made, certain missteps can cause long-lasting damage to your business credit. This article explores the 5 worst mistakes to make while building business credit, offering expert advice and real-world examples to help you avoid them.

What is Business Credit?

Before we dive into the worst mistakes you can make while building business credit, it’s important to have a good, foundational understanding of what exactly business credit is and what’s included in your business credit report.

Business credit refers to the creditworthiness of a business. It’s important to note that a business’s credit is separate from the personal credit of its owners. A business’s credit is essentially a measure of the business's ability to pay back debts and fulfill financial obligations. Building business credit is crucial for financing your business, negotiating good credit payment terms with vendors, and establishing credibility with customers and partners. Establishing and maintaining decent business credit doesn’t happen overnight, but with time, consistency, and good habits, you are sure to create a healthy business credit.

Business credit is determined by a variety of factors, including payment history, credit utilization, length of credit history, and public records. These elements are all included on a business’s credit report. A business credit report is a document that provides information about a business's creditworthiness and financial history. It includes information such as the business's credit score, payment history, credit utilization, length of credit history, public records such as bankruptcies and liens, and other financial information. Business credit reports are compiled by credit reporting agencies, which collect and analyze data from various sources including banks, credit card companies, and public records.

Why Is Building Good Business Credit Important?

Building business credit is essential for any business owner who wants to establish a strong financial foundation and position their business for success. Here are a few reasons why building business credit is so important:

• Access to financing: One of the primary benefits of building business credit is that it can make it easier for businesses to access financing. With strong business credit, businesses can qualify for loans, lines of credit, and other forms of financing at lower interest rates and with more favorable terms.
• Better terms with vendors: In addition to financing, businesses with strong credit can also negotiate better terms with vendors. This can include longer payment terms, lower prices, and access to higher-quality products and services.
• Credibility with customers and partners: Building strong business credit can also help businesses establish credibility with customers and partners. A strong credit score and credit history can signal to potential customers that a business is financially stable and trustworthy, which can be an important factor in their decision to do business with that company.
• Protection of personal assets: By establishing separate business credit, business owners can protect their personal assets in the event that their business experiences financial difficulties. This separation of personal and business finances can also make it easier to track business expenses and income, and can help business owners avoid common mistakes such as mixing personal and business finances.
• Expansion opportunities: Finally, building strong business credit can open up new opportunities for business growth and expansion. With access to financing and favorable terms with vendors, businesses can more easily invest in new products or services, expand into new markets, or make strategic acquisitions.

As we said, there are a lot of potential mistakes that a business owner can make when it comes to building up their business credit. However, there are several that have the potential to cause bigger, longer-lasting damage to your business credit. We don’t tell you these to scare you, but to educate you on what not to do, as well providing practical tips in order to avoid these pitfalls.

Here are the 5 worst mistakes you can make when it comes to building your business credit.

Mistake #1: Mixing Personal Finances & Business Finances

It is important to keep personal and business finances separate when building business credit. Combining the two can lead to confusion and mistakes in record-keeping, which can harm your credit score and affect your ability to secure financing or credit in the future. It can also put your personal assets at risk if your business runs into financial trouble, potentially leaving you vulnerable to legal action or bankruptcy. Additionally, lenders and creditors may view mixing personal and business finances as a sign of financial irresponsibility, which could negatively impact your ability to secure funding or credit. By keeping personal and business finances separate, you can establish a strong credit history for your business and protect your personal assets.

How To Avoid This Mistake:

To avoid mixing personal and business finances, it's essential to open a separate bank account for your business and ensure that all business transactions are conducted through this account. This will help you keep track of your business's financial health and avoid any confusion with your personal finances. It's also important to create a budget and track all expenses to ensure that your business stays within its means. Consider using accounting software or hiring a professional accountant to help you manage your finances effectively for your business. Also avoid using personal credit cards or loans for business expenses, and vice versa by avoiding business funds for personal purchases.

You can track your business’s past financial activity and credit by purchasing a business credit report through one of the three business credit reporting agencies: Dun & Bradstreet, Experian and Equifax. Your business credit report is separate from your personal credit report and is a great way to keep tabs on your business credit happenings and health. This leads to the next major mistake…

Mistake #2: Failing to Monitor Your Business Credit Report

Failing to monitor your business credit report can be a costly mistake. Your credit report contains important information about your business's credit history, including payment history, outstanding balances, and credit utilization. If you don't keep an eye on this information, you may not be aware of errors or fraudulent activity that can harm your credit score and impact your ability to secure funding or credit in the future. It's also important to monitor your credit report to ensure that your business is on track to meet its financial goals and identify areas for improvement. Viewing your report regularly before any potential lenders or vendors do is key, as you can then ensure it’s up-to-date and in good standing. By regularly monitoring your credit report, you can take action to address issues before they become bigger problems.

How To Avoid This Mistake

A simple way to avoid this mistake is to establish a routine for regularly checking your credit report. You can obtain a copy of your business credit report from the major credit bureaus such as Equifax, Experian, and Dun & Bradstreet for a small fee. (Business credit reports are not free, unlike personal credit reports.) Review your report for any errors, fraudulent activity, or inaccurate information that could harm your credit score. Set up alerts with the credit bureaus to notify you of any changes to your credit report, such as new accounts or inquiries. You can also choose to work with a professional credit monitoring service to get regular updates and track your credit score over time.

Mistake #3: Applying For Too Many Business Credit Accounts At Once

Applying for too many business credit accounts at once can negatively affect your business credit report. Each time you apply for credit, the lender will perform a hard inquiry on your credit report, which can temporarily lower your credit score. Having too many open credit accounts can also make it difficult to manage your business's finances effectively, leading to overspending and increased debt. It's important to be selective when applying for credit and only apply for accounts that you need and that have the best chance of advancing your business.

Having too many open credit accounts can also show other lenders or vendors that you may be in financial trouble. They may assume that you are needing to borrow so much because your business is in jeopardy or that you don’t know how to manage your money well.

How To Avoid This Mistake

To avoid the mistake of applying for too many business credit accounts at once, it's important to have a clear understanding of your business's credit needs and apply only for the accounts you need. Before applying, check your business credit report and score to ensure that you're likely to be approved. Consider working with a professional credit advisor to develop a strategy for managing your business's credit effectively. Focus on building strong relationships with lenders and creditors and paying your bills on time to establish a positive credit history. You should also keep track of your business's financial health and review your credit report regularly to ensure that your credit profile is accurate and up-to-date. By being strategic and intentional in your credit applications, you can avoid the negative consequences of applying for too much credit at once.

Mistake #4: Making Late Payments

This one may seem obvious, but making late payments can have a significant negative impact on building up your business credit. Late payments can cause your credit score to decrease, which can make it more difficult to qualify for financing or negotiate favorable terms with vendors. Late payments can also trigger penalties and fees, which can add up over time and hurt your cash flow. Additionally, late payments can damage your business's reputation and credibility with customers and partners, making it harder to attract and retain new business relationships and partnerships.

How To Avoid This Mistake

Making payments on time and in full on your business credit account over time is one of the best things you can do to not only improve your business credit report and score, but also shows potential lenders and vendors that you are trustworthy and responsible with money. It may seem like a simple thing, but this simple act is one of the actions on your business credit report that can make or break the health of it.

Mistake #5: Failing To Establish A Credit History

Not establishing a credit history is a common mistake made by new businesses or those who have not used credit in the past. Without a credit history, it can be difficult to obtain financing or negotiate favorable terms with vendors. Building a credit history takes time, but it is essential for establishing credibility and financial stability. By opening credit accounts and making payments on time, businesses can start to establish a credit history and build up a positive credit report to be able to apply for larger funding later on.

One factor that can contribute to this mistake is your vendors not reporting your payment history to the business credit agencies. Vendors are of course quick to report late payments or missed payments to the credit agencies, but some don’t report positive payment history.

How To Avoid This Mistake

By opening credit accounts and making payments on time, businesses can start to establish a credit history and build up a positive credit report to be able to apply for larger funding later on.

If you view your business credit report, and notice that a certain vendor hasn’t reported your positive payment history to the credit agencies, then you can either ask them to report it themselves or you go report it yourself to the credit bureau for your business. Positive payment history records boost the health of your business credit.

Bottom Line

Building business credit is a crucial aspect of any business owner's financial strategy. There are common mistakes that can damage a business's credit score and limit its ability to secure financing and negotiate favorable terms with vendors. Mixing personal and business finances, failing to monitor credit reports, applying for too many credit accounts at once, making late payments, and failing to establish a credit history are all mistakes that should be avoided. By taking a proactive approach to building their business credit and avoiding these mistakes, business owners can establish a strong financial foundation and position their businesses for success.

Frequently Asked Questions

Why is it important to separate personal and business finances?

Separating personal and business finances helps maintain clear financial records and protects personal assets from business liabilities. This separation also enhances your business creditworthiness by providing clear insights into business operations for lenders and credit agencies.

How often should I check my business credit report?

It's recommended to check your business credit report at least annually. However, if you are planning significant business moves, like applying for a new credit line or a large loan, increase the frequency to quarterly to ensure all information is accurate and to address any discrepancies promptly.

What are the consequences of applying for too many credit accounts at once?

Applying for multiple credit accounts in a short period can lead to multiple hard inquiries on your credit report, which may temporarily lower your credit score. It can also give potential creditors the impression that your business is financially overextended.

What should I do if I make a late payment?

If you make a late payment, immediately pay the due amount and contact the creditor to explain the situation. Ask if they can refrain from reporting the late payment to credit agencies or waive any late fees. Implement strategies to prevent future late payments, such as setting up automatic payments.

How can I establish a business credit history if I'm just starting out?

Start by opening a business credit card and small trade lines with vendors that report to credit bureaus. Ensure that all payments are made on time, and keep your credit utilization low to build a positive credit history gradually.

About The Author

Bryan Huynh

Product Tester & Writer

Bryan Huynh, a committed Product Tester and Writer, ensures that you are well-informed, guiding you in discovering and comparing top-rated financial services, including personal loans, business loans, credit repair, and tax relief.

Articles by Bryan Huynh

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