Gamblers use it all the time. So do entrepreneurs, especially the ones who don’t have any money. Nothing crushes the entrepreneurial spirit faster than having a great opportunity to expand your business, and not being able to fund it.
The business plan may be flawless, the product may be perfect and the public may love it — but what if you’re tapped out? Well, that’s when you need good credit. It’s the wood that keeps the fire burning and nobody ever has enough of it.
And the easiest place to find it should be right there in your wallet: A business credit card. Much like its first-cousin the personal credit card, a business credit card is a practical, convenient, necessary item in establishing credit. They are much easier to obtain than small business loans and, when used properly, will build the credit rating for your business.
They also serve as a promotional tool, letting the rest of the business community know you’re here, growing and wanting to do business with them.
It is extremely important, however, not to confuse a business and personal credit card. Owners may put their business name on one card, but unless that business is a separate legal entity – typically a corporation or limited liability company (LLC) – the legal responsibilities are still in the owner’s name, not the company.
Register your business, no matter how small, as a corporation or LLC. Then get a credit card in the company’s name and do not mix and match with your personal card. Shop around before deciding which card is best for your business. There are just as many cards, like Visa, MasterCard and American Express, and reward programs available for businesses as there are for personal credit cards. According to a study by BillShrink, almost half of business credit cards have no annual fee. Interest rates and grace periods also vary greatly.
Be careful to read the fine print on any agreement before signing up for a card. Business credit cards do not offer the same government protection as personal cards.
A business credit card will help your enterprise build a credit rating the same way personal cards do and for the same purpose: Access to bank loans and favorable interest rates. Not surprisingly, prompt payment is the biggest factor in improving your business credit rating.
Using a business credit card should make your monthly or quarterly accounting work far easier, so long as you use it exclusively on business-related purchases. Do not buy supplies or equipment with your personal card and figure you’ll square things up at the end of the month. Dedicate the business card to all business expenses and you will be thankful, especially come tax time.
Another way to build your credit rating is to deal only with businesses that report payment experiences to the business credit bureaus like Experian, Equifax and especially Dun & Bradstreet. Not all businesses do that, so inquire before purchasing.
Time is a factor in establishing a business credit rating. Lenders like to see your business active in purchasing and paying for purchases before extending you credit. Shopping regularly at a chain business supply store in your neighborhood – and using their credit payment account – is probably the easiest way to improve your business credit rating in this area.
Whatever you do, make sure your business plan includes specific goals for building a credit rating. At some point, you’re going to need money to make money and a having good credit is wood for the fire when your business needs it.
Bill Fay is a writer for Debt.org, focused mainly on news stories about the spending habits of families and government. He spent 21 years in the newspaper business and eight more in television and radio, dealing with college and professional sports, then seven forgettable years writing speeches and marketing materials for a government agency.