Building business credit is important for any business owner looking to establish financial stability and grow their company. One way to build business credit is by credit cards.
However, many business owners ask me whether using credit cards will actually help build credit or if it could yield unintended consequences.
In this article, I will explore this area so you can understand the pros and cons.
How Business Credit Cards Affect Business Credit Scores
Business credit cards play an important role in the formation and management of a business’s credit profile. Here’s how they affect business credit scores:
- Establishment of Credit: Applying for a business credit card is often one of the first steps businesses take to establish a credit profile. If approved, the business now has a revolving credit line in its name. Just like with personal credit, establishing business credit is vital for future financial opportunities.
- Payment History: Much like personal credit scores, the most significant factor in determining a business credit score is payment history. If your business pays off its credit card bills on time and in full, it will positively impact your business credit score. Conversely, late or missed payments will have a negative effect.
- Credit Utilization Ratio: This is the percentage of available credit your business is using. It’s a good idea to keep this ratio low. High utilization can indicate that a business might be overextended and can negatively impact the business’s credit score.
- Length of Credit History: Over time, maintaining open credit accounts with a good payment history can benefit a business’s credit score. This demonstrates consistency and reliability.
- Credit Inquiries: Each time you apply for a new business credit card or other credit product, a hard inquiry is typically performed on the business credit profile. Multiple inquiries in a short time can signal to lenders that a business might be a high-risk borrower, which could lower the score.
- Mix of Credit Types: While less significant than payment history or utilization, having a mix of credit types (e.g., credit cards, term loans, and lines of credit) can have a positive effect on a business’s credit score.
- Public Records and Collections: Business credit profiles can also contain public records such as liens, judgments, or bankruptcies. These can significantly harm a business’s credit score. Similarly, any accounts sent to collections will also have a negative impact.
How to Use Business Credit Cards to Build Business Credit
Using a business credit card prudently is an effective method to build a robust business credit profile in the UK. Here’s a step-by-step guide on how to use business credit cards to build business credit:
- Choose the Right Business Credit Card:
- Opt for a card that reports to major business credit reference agencies in the UK, such as Experian, Equifax, and Creditsafe.
- Check for annual fees, interest rates, and other charges. Also, consider cards that offer beneficial rewards and perks relevant to your business.
- Separate Business and Personal Expenses:
- Use the business credit card solely for business-related expenses. This helps in better financial record-keeping and ensures that your business’s financial activities remain separate from personal ones.
- Timely Payments:
- Always pay your business credit card bills on time. Your payment history is a crucial factor in your business credit score.
- If possible, set up a direct debit to ensure you don’t miss payments.
- Maintain Low Credit Utilisation:
- Aim to keep your card balance low relative to your credit limit. A rule of thumb is to keep your utilisation below 30%. This means if you have a credit limit of £10,000, try to keep your balance under £3,000.
- High utilisation can indicate potential financial stress to creditors and may negatively impact your business credit score.
- Increase Credit Limits:
- After a period of responsible usage, consider requesting a credit limit increase. A higher limit (with controlled spending) can reduce your utilisation ratio, further benefiting your business credit profile.
- Diversify Types of Business Credit:
- Over time, consider adding other types of credit, like a line of credit or term loan, to further diversify your business’s credit profile.
- Monitor Your Business Credit Report:
- Regularly review your business credit reports to ensure accuracy. Mistakes can happen, and it’s crucial to correct any discrepancies promptly.
- Avoid Opening Too Many Cards Quickly:
- Each time you apply for credit, an inquiry is made, which can temporarily lower your business credit score. Space out your applications and only apply for new credit when necessary.
- Maintain Older Accounts:
- The length of your credit history plays a role in your credit score. Try to keep your oldest credit accounts open to demonstrate a longer history of credit management.
- Handle Disputes Promptly:
- If you ever have a dispute with a supplier or other business, resolve it swiftly. Unresolved disputes can lead to collections, which can significantly harm your business credit score.
Remember, while using a business credit card is an excellent tool to build business credit in the UK, it’s also a responsibility. It’s crucial to ensure that the card doesn’t lead to unnecessary spending. Use credit as a tool and not as a way to live beyond the company’s means.
Was My Credit Checked When I Got My Company Credit Card?
Whether or not your credit was checked when you received a company credit card depends on a few factors:
- Credit Card Issuer:
- American Express (Amex): When you apply for an Amex business card, American Express will typically perform a credit check with both consumer and business credit bureaus. This means your personal credit history can be a factor in the approval decision.
- Capital on Tap: Capital on Tap, on the other hand, typically only conducts a soft credit check for their business cards. A soft check does not impact your credit score, so you can apply without worrying about a hit to your credit.
- Company’s Policies: Some companies might have policies or preferences regarding which credit card issuers they choose based on the credit checking practices, especially if the employee is expected to be a primary cardholder or is personally responsible for charges on the card.
- Personal Guarantee: If you provided a personal guarantee when the business credit card account was opened, then your personal credit would likely have been checked. This means that if the business fails to repay the credit card debt, you’d be personally responsible for repayment. This is common in smaller businesses or startups without a substantial credit history.
- Role in the Company: If you’re an owner or principal in the company, your personal credit is more likely to be checked when applying for a company credit card, especially if the business is a sole proprietorship or partnership. For larger corporations, individual employees usually don’t have their credit checked unless they’re personally guaranteeing the card.
- Joint & Several Liability Cards: Some business cards operate under a “joint and several liability” principle. This means both the business and individual cardholders are responsible for the debt. Card issuers might check both personal and business credit in such scenarios.
How can a business credit card negatively impact my personal credit?
A business credit card can have both direct and indirect effects on your personal credit. Here’s how it could negatively impact your credit:
- Personal Guarantee: Many business credit cards require the business owner or primary cardholder to provide a personal guarantee. This means that if the business defaults on the credit card payments, the card issuer can hold the individual who provided the guarantee responsible. If the business fails to make payments and you don’t cover those payments, it could lead to negative marks on your personal credit report.
- Credit Inquiry: When you apply for a business credit card, the card issuer might do a hard inquiry on your personal credit report, especially if a personal guarantee is involved. This inquiry can temporarily lower your personal credit score by a few points.
- High Utilization: If your business card activity is reported to consumer credit bureaus (which is less common but possible, especially for smaller businesses or sole proprietorships), high utilization of your credit limit can negatively impact your credit score. A high credit utilization ratio (debt relative to your credit limit) can be a sign of financial strain and might lower your score.
- Mix of Credit Types: If the business card appears on your personal credit report, it could affect the mix of credit types on your report. While this is a minor factor in credit scoring, it’s still a factor.
- Late or Missed Payments: Again, if the business credit card activity is reported to consumer credit bureaus and the account experiences late or missed payments, it can have a significantly negative effect on your personal credit score.
- Joint & Several Liability Cards: If you have a business credit card that operates under a “joint and several liability” principle, both the business and individual cardholders are responsible for the debt. Therefore, any negative marks, like late payments, can show up on the personal credit reports of those individuals.
- Closing the Account: Closing a business credit card that’s linked to your personal credit might affect your overall credit age or the total available credit, which can, in turn, impact your credit score.
It’s important to note that many business credit cards report only to business credit bureaus (like Dun & Bradstreet, Experian Business, etc.) and not to consumer credit bureaus (like Experian, Equifax, and TransUnion). However, this isn’t universally true, and some issuers might report to both, especially if there’s negative activity on the account.
