Just as individuals have credit scores that help inform potential lenders of the potential risk associated with extending credit to them, businesses have their own unique credit score and profile. Businesses that take the time to concentrate on establishing themselves as a separate entity often realize many more opportunities in the business world than those that do not maintain this focus. Maintaining good business credit correlates with several other business advantages.
Larger Business Loans
Businesses that have a strong credit history are often able to obtain larger business loans easier from financial institutions and private lenders. People with shaky histories can still obtain a business loan with bad credit, the amount will likely be smaller. Much like people with poor credit, people without collateral can still get an unsecured business loan, but again the amount will be less. With a proven track record of paying on debts and other responsible fiscal behavior as well as having good collateral, businesses can secure larger loans. These loans can help them cover periods of low cash flow, provide opportunities to expand their business, provide opportunities to launch a new product or service, or provide a reserve in case of a rainy day. Check out the Halo Capital Blog for more tips about getting funded and improving your credit.
Improved Terms and Conditions
Not only will loans be bigger, but businesses may also see improved terms and conditions of the loans. There may not be a requirement of a personal guarantee. Interest rates may be lower. The time to repay may be longer. All of these are possibilities with a strong financial record.
Businesses may wish to expand their business through other mediums than loans. For example, they may want to pitch their ideas to venture capitalists and private investors. Having a strong credit profile is one way of demonstrating financial health to outside parties.
Separation of Business and Personal Profiles
Establishing good credit in the separate name of the business can help business owners establish an identity distinct to this other entity that is truly separate from their own identity. This helps in case the business itself gets in too deep. The business owner can separate business losses from personal losses as long as steps were taken to create the business entity outside of a sole proprietorship or partnership scheme. This way, the business owner can regroup and launch another business when the time is right.
It is also necessary to establish a separate credit identity from the business owner in case claims arise against the business owner. To avoid an order to pierce the corporate veil of a company, the business must be able to show that it was a separate entity. This may be possible by having separate bank accounts, credit cards, addresses, officers, and documented transactions that demonstrate this separation.