This blog is written by John Rampton, and does not necessarily reflect the views of Western Union.
Out of all the tasks involved with starting a business, worrying about your credit and money may be one of your biggest concerns. The thing is, if you take the time to build your credit in the first place and do your homework before obtaining credit, the care of your business finances may ultimately be able to save you money, time, and help you have fewer headaches.
Here are 8 common mistakes that small business owners make when it comes to credit. Knowing these mistakes or pitfalls in advance can keep you from making them with your business.
Not Making Payments on Time
Just like your personal credit card or loan, not paying your bill on time impacts your credit score. Unlike personal credit cards or loans, however, the lender may not give you 30 days until it’s marked as late. Missing a payment by even just one day can drop your credit score almost immediately.
While cash flow can be an issue when just starting out with your new business, or if you’re a freelancer or work on commission, business owners have to be aware of when a due date is approaching and make the payment on-time. This takes some planning on your end since you’ll have to send out your early enough so that you’ll receive a payment in-time to pay your expenses.
Failing to Check Report Errors
The Wall Street Journal found in a 2013 survey that just “one in three small-business owners has checked his or her business credit report within the past two years.” Even more troubling? The “firms that did check their reports, one quarter said they found errors, or missing financial data that put their business in a riskier category.” This can lead to getting denied trade credit by a supplier or vendor credit because the business has been classified as “risky.”
Before applying for credit, make sure that your personal and business profiles are in order. And, don’t forget to include business data like sales and revenue figures.
When you do check your reports, never pay for them. You can receive free reports from the three main business credit bureaus; Dun & Bradstreet, Experian, and Equifax.
Relying Just on Your Personal Credit
If you’re a new business owner, you probably haven’t built-up your business's credit score enough to receive the credit you will eventually need. In that case, you may have to use your personal credit score to secure that initial line of credit.
The problem is that eventually your business and personal finances will become entangled. And, that’s a problem when tax time rolls around or the business fails since you’ll be personally liable.
separate by taking small measures like opening a business bank account and building your business credit score so that you can use your business tax ID number to obtain credit.
Not Monitoring Your Credit
It’s not uncommon for business owners to only check their credit whenever they need to, like when it’s time to apply for a new credit card or loan. Your vendors and lenders, however, continually monitor your credit.
By monitoring your credit you’ll receive alerts if your credit score changes or if there is any fraudulent activity - both of which could cost your business.
Borrowing From the Wrong Lenders
There are hundreds of credit options available for business owners to consider. Each option has pros and cons, so do your due diligence and weigh these options before committing to a lender. For example, it wouldn’t make sense to apply for a credit card that only offers travel rewards when you may only make an annual business trip.
To make sure that you select the right vendor, examine things like;
- Does the lender report to the credit bureaus?
- Did you select the right type of card for your business? For example, if you need to rebuild your credit, then select a credit improvement card.
- Are you selecting a card that offers rewards that you can actually use for business?
- Is it a card or loan with a preset lending limit? For example, some cards may only allow you spend $2,000 per month, even though you still have a credit limit on the card.
Not Taking into Account Transaction Fees
There are no shortage of fees when it comes to credit. Some are obvious, while others may catch you off-guard. Regardless, these fees can quickly add-up and drain your limit. So, it’s important that you consider these fees when applying for and using credit.
The most common fees typically include;
- Foreign transaction fees for each overseas transaction.
- Balance transfer fees, even though there’s an introductory APR.
- Cash advance fees, along with hefty interest rates.
- Rewards programs fees that require you to pay a fee in order to take advantage of the perks.
- Over limit fees that are proportional to the amount that was exceeded.
- Late fees.
Spending Beyond Your Means
This should be Credit 101, but it still happens all of the time. You spend more than you’re able to pay for. In other words, if you can’t pay off your balance when the bill arrives, then you are spending beyond your means. Remember, having a balance means that you’ll be stuck with high interest rates and potentially a steep monthly payment.
Closing Existing Accounts
“If you’ve already opened a large number of accounts, don’t close them out, especially if you’re trying to improve your score,” writes Peter Daisyme. “Lenders and property management companies are interested in your business’s credit history and by closing your cards, you’re limiting that history.”
Daisyme adds, “This is especially true of those older cards that are still lingering. That said, if you have an old account that is costing your business in non-usage fees, you may have to weigh the damage to your score against the money you’re paying each month. Experts recommend that consumers keep four to six accounts open at all times in order to maintain a healthy credit score.”
John Rampton is an entrepreneur, investor, online marketing guru and startup enthusiast. He is founder of the online invoicing company Due. John is best known as an entrepreneur and connector. He was recently named #2 on Top 50 Online Influencers in the World by Entrepreneur Magazine and a blogging expert by Time. He currently advises several companies in the San Francisco Bay area.