The temptation to use personal credit to pay for business expenses can be tempting for many small business owners—particularly when other small business financing is so hard to come by. Nevertheless, you should avoid the temptation. Using your personal credit cards, for example, to pay for business expenses can actually damage your personal credit score, making it even more difficult to secure small business financing in the future.
One of the ways the credit bureaus evaluate your personal credit score is by looking at the amount of credit you use versus the amount of credit you have available. So if you regularly run the balances of your personal credit cards up paying for business expenses, even if you pay the balances down at the end of every month, it could still hurt your personal credit. One of the easier-to-get sources of business credit for many small business owners is a business credit card. With that in mind, here are 5 tips that will help you qualify:
1. Know your personal credit score: When was the last time you reviewed your personal credit score? Not only is it important to know your score, it’s not uncommon to discover mistakes on your credit report—which can make it harder to secure a small business loan when you need it. Federal law requires that consumers in the U.S. have free access to their credit report once a year (in Canada, you can request a hard copy of your credit report by mail as often as you’d like). Take advantage of this opportunity at least yearly to see where you stand. There are also numerous services, which for a fairly nominal fee (some are even free), will monitor your personal credit report and notify you any time there is a change.
2. Make sure your business credit profile is accurate: Every bit as important as your personal credit score is your business credit profile. Many business owners are unaware they have a business credit profile. Even if you haven’t established any business credit accounts you will still have a business credit profile. The three major business credit reporting bureaus (Experian, Dunn & Bradstreet, and Equifax) all utilize information available via the public record to create your business credit profile, so it’s important to make sure the information they have is accurate. Fortunately, they are all motivated to make sure the information they provide is accurate, so they all have dispute processes in place so you can have inaccurate information about your business corrected.
3. Pay down your credit balances: As mentioned above, one of the ways the credit bureaus evaluate your creditworthiness is by measuring how much credit you have vs. how much credit you use. They call this your credit utilization ratio. For example, if you have a $5,000 credit limit on a personal credit card and regularly carry a $4,000 balance, you have a ratio of roughly 80 percent on that card—which is considered high. A good rule of thumb is to try to maintain a ratio closer to 30 percent. Keeping a lower credit utilization ratio on you personal credit cards tells a lender you are able to wisely manage your available credit and will help you qualify for a business credit card.
4. Make sure you stay current with vendors and suppliers: If you have trade credit accounts with vendors, make sure you make timely payments. Building a strong business credit profile starts with these types of relationships for many small business owners, so could be a great place to look for credit if you’re not doing so now. In fact, how current you are with your suppliers has a direct impact on your business credit profile and can impact whether or not you can qualify for a business credit card.
5. Make sure your credit card application is accurate: This might sound obvious, but a lender will likely compare the information you supply in your application to other information available within the public record. Inaccuracies will pop us as red flags. While some lenders will give you the opportunity to verify the information in your application, there will be others who might simply deny your application based upon what they perceive as inconsistencies.
A business credit card can be an important tool to help you establish business credit in the early stages of your business. It’s relatively easy to qualify for compared to other small business loans and can help you build a track record that will help you qualify for additional business credit down the road.
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