There’s a lot of financial advice out there for small business owners. You have to be careful when reading most of it, because many of the sources of this advice are trying to sell you something.
But practicing responsible behavior around business credit and financing isn’t rocket science. It’s all about spending within your means and understanding the consequences of racking up debt.
Distringuishing what’s myth and what’s fact when it comes to business finances can make a huge difference in the success of a company. So, let’s get myth-busting.
Myth #1: I can’t get a credit card for my small business
It’s a common feeling for small business owners. It sometimes feels like the only way to get business credit is to start out with some. While it can be frustratingly hard to start building business credit from scratch, it’s just a matter of time before good credit practices kick in and improve your business’ credit score.
You will probably have to use your personal credit in the beginning to qualify for a business credit card. But if you use a card that reports to the business credit reporting agencies, like Dun and Bradstreet, you’ll have a head start along the path of building business credit. Make sure you set up your files at D&B correctly, so that you’ll start building credit for your business right away.
There are plenty of business credit cards out there for businesses with poor or no credit. There are also products, like secured business credit cards, that are specifically designed to help small businesses build credit. It’s a process — you may need to put your personal credit on the line to start and begin with a card with a very small credit line, but if you pay your bills on time and make sure your credit history is being reported to D&B, you’ll be able to eventually rely on your business credit to fund your business.
Myth #2: It doesn’t make a difference whether I use my personal credit or business credit
Because it’s hard to establish and build credit for a SMB without using personal credit in the beginning, many people think that it doesn’t really matter whether you use business or personal credit over time. That’s wrong — it does matter.
Creating a corporate entity, like an LLC or C-corporation, protects a small business owner from personal legal liability. Using business credit, and not an owner’s own personal credit, does the same thing financially.
By building credit in a business, an SMB owner removes his or her personal finances from the equation. That helps with legal liability but it also means that it empowers the business itself to qualify and build credit that could potentially massively outstrip the personal credit of its owners.
Myth #3: If a bank won’t approve my loan, my business is up the creek
Banks used to be the only game in town when it came to financing small businesses. But in the wake of the 2008 credit crisis, they’ve become much more picky in the types of businesses they lend to. That means many SMBs hit a dead end when they approach their local banks for loans.
As SMB bank lending has dried up, though, many new types of lenders have emerged that are interested in providing financing to small businesses. Many of these lenders exist online, without any local branches. Firms like Lending Club, Funding Circle, Fundbox, and Behalf have all kinds of different loans — like lines of credit and invoice financing, designed to help small businesses access capital.
Myth #4: Checking your business credit report negatively affects your score
There are two different ways people and companies can access a credit report:
- A hard pull: When a credit card company accesses a business’ credit report with the intention of making a loan
- A soft pull: When a credit report is accessed for any other reason
A hard pull gets added to your credit file and if there are too many of them, lenders may seem them as red flags, signs that your business is desperate for financing.
When you access your business credit score, like the kind D&B produces, it results in a soft pull, which doesn’t impact your business credit score. In fact, it’s a good idea to periodically check your business credit score to ensure things are headed in the right direction and that there aren’t any surprises showing up and impacting your score.
Myth #5: Your business credit score is based on how frequently you pay your bills on time
Listen, paying your bills on time is a major part of your credit history and is one of the most influential behaviors that affects your business credit score. Credit scores, like D&B’s PAYDEX (one of the most popular scores used by lenders), uses the previous 12 months of on-time payment history to determine a business’ score. The more bills paid on time, the higher the score.
But while on-time payment behavior is the major component of a business score, there are other things that impact a business’ credit score. Things like liens and judgments and previous bankruptcies, as well as credit card utilization rates, influence business credit scoring.
Myth #6: Using debit card can be a good option to build credit
Debit cards are easy to come by for small businesses. They’re accepted by most suppliers and business partners and they draw directly from a business’ bank account.
But debit cards do not influence a business’ credit score. That’s because there’s no use of credit involved in using a debit card. It’s straight cash passing from a bank account to a vendor. Credit cards, on the other hand, involve the short term issue of credit and therefore, payments on credit cards will impact business credit scores.
Myth #7: It’s not that bad to pay the minimum due
Every month you carry a balance on your business credit card, your credit card company will offer you a minimum payment to make on your bill. That smaller payment might look appealing but it’s a slippery slope when you don’t pay your credit card bill in full at the end of the billing period.
Here’s why: Minimum payments are either set as a fixed amount (pay $25 this month) or as a percentage of your outstanding balance (like 1% to 3%). If you make a minimum payment, you’ll avoid late fees, but you won’t pay down your balance. This puts you on a “debt treadmill“, where you keep paying and paying and paying, without ever paying off your debt.
Worse, with a business credit card, your credit utilization rate can fluctuate as the balance you carry grows. Your credit utilization rate, the percentage of your credit line that you actually use, demonstrates how responsibly you use credit. If that number suddenly goes much higher (most experts recommend keeping your utilization rate at around 30%), your credit score may worsen.
Listen, if you can’t pay off your credit balance in full, you have to pay at least the minimum payment. You definitely don’t want to wait until after the billing cycle to pay, because missing the due date of your bill can be disastrous. Most business credit cards have a “penalty APR” rate can get implemented almost immediately after you miss making a payment on time. That could potentially double the amount of interest you pay every month.