What common mistakes hurt business credit, and how can you avoid them?

Establishing business credit is essential to the survival and growth of a company.

Most businesses need access to cash. This is how they pay their ongoing bills while they wait for customers to pay up. The rates and terms they can get largely depend on the credit profile of the business and its owner.

A mere five common habits can tank your business credit score. None of these habits are deliberate attempts to cheat or mislead. They’re the result of simple (and common) mistakes. Let’s dive deeper into each of these problems and the ways to fix them.

Keep Business Costs Off the Personal Cards

When cash flow gets tight, it’s tempting to put some business expenses on a personal credit card. It’s usually a bad idea for two reasons. First, it builds no business credit. Second, it can drive down your personal credit score, especially if you carry a big unpaid balance. It doesn’t take long to run up a big unpaid balance, which means bigger monthly payments. The monthly interest can also be a real killer. Keep business costs off the personal cards, just to be safe.

You might also be tempted to dip into the home equity to fund the business. The danger there is clear: if you miss payments, your family could lose its home.

Your credit score is supposed to reflect your repayment habits on personal loans, not business loans. Still, Dun & Bradstreet, Equifax and Experian all use your personal credit score in determining business creditworthiness. A weak personal record can lead to stiff terms for business financing.

Monitor Your Credit Report

A lot of new owners, or people who never took a business loan before, think their companies don’t even have a credit history. You can look yours up through Dun & Bradstreet, Equifax or Experian.

Do monitor your credit report, at least once a year. It lets you figure out your risk, and how you can lower it. If you spot any errors or out-of-date info, take the time to get it all fixed, right then.

You don’t want to let your credit report go stale. The credit agencies’ formulas combine a range of measures. A lender may withhold the best terms if any of the details look bad or incomplete. Keeping your info as current as possible keeps the errors and the omissions down.

Make sure you check each item closely for mistakes. Here is what comes up on the report:

• Credit history: how long it goes back, how much of your available credit is used up, your repayment record, and how much you owe.
• Public records: This covers bankruptcies, liens, judgments and UCC filings.
• Your company’s information: how many people it employs, how long it’s been in business, and what industry it’s in.
• Finances: how much money the business makes, and how the cash flow looks.
• The owner’s own personal credit history.

Maybe you spotted something in the report that isn’t quite right. Or maybe some of it got out of date. The simplest fix is to contact the credit agency that issued the report. Each of them has its own updating process. Some even let you fix some items online.

Building Your Business Profile

Yet another danger is suppliers who don’t report your business’s repayment record. Their terms are called trade credit. They usually give 30 days to pay, or maybe 60. Still, they do expect payments on time. Don’t forget: ask your suppliers to report your timely payments to Dun & Bradstreet, Equifax and Experian. It all builds your profile with them.

Make sure your current loans and credit are building your business profile. There are business cards targeted at a range of people. Amazon sellers have several designed just for them, for example. Any you use should build your business credit record. Check with the provider of your business card whether it reports to business credit bureaus. Some don’t. They report only to consumer bureaus, which means they can’t build your business credit rating.

Another easily avoidable blunder is the failure to register the company, like as an LLC. Registering is a good idea even if you’re the only employee. A sole proprietor’s credit cards might be issued in your personal name, for example. You want a system that builds up your business’s own credit profile.

Fortunately, help is easy to find: through services like LegalZoom and The Company Corporation, which handle incorporation, and on many points you may want a good accountant’s advice.

To sum up: building strong business credit is fairly simple. You want to keep your personal finances, and those of the business, separate. Watch your credit report carefully, and let credit agencies know right away if anything’s wrong. Then simply pay on time.