As the corks were popping, you declared this was the year to really grow the company, remember? Although many entrepreneurs start a business with personal savings and personal credit, expanding it usually takes a business loan. Getting a business loan requires business credit. Here are three things you need to know to take that next big step. First, build credit when you don’t need it. Second, to the extent possible, separate your business credit from your personal credit. Finally, once you have established business credit, take an active role in managing it.
When Should I Begin to Build Business Credit?
It often takes several months to establish any sizeable line of credit, and potential lenders are not going to be happy to meet you for the first time when you’re two weeks away from running out of operating capital. So, the answer to that question is yesterday.
The first steps are often very simple, though. If you’ve been in business for a year or two, you have probably already done much of this. Get a phone number in the name of the business, and pay bills from a separate business checking account. Make sure that your business has its own federal tax identification number, sometimes known as an employer identification number (EIN), which you will need to open the business checking account, anyway. If you got started with a business plan sketched out on a napkin, frame the napkin and get a professional plan done. This plan, along with financial statements (preferably audited), will be the basis of any credit application. Potential lenders are simple creatures. They want to see that you have the accounts receivable to repay a loan.
Why Can’t I Just Keep Going as a Sole Proprietorship?
If you are operating as a sole proprietorship, talk to a competent attorney about the potential for personal liability. But from a credit perspective, remember that too many inquiries may depress a credit score. Having personal and business inquiries about the same entity can double or triple that problematic number. Many entrepreneurs choose to do business as corporations or LLCs to establish a separate credit identity, among many other reasons. It is a way of protecting both your business and personal financial reputation.
I’ve Already Done All That. Now What?
You may already have a business credit file with Dun & Bradstreet. You can find this out by calling D&B Customer Service at by visiting their web site. If you do not have a business credit file, establish one by applying for a D-U-N-S® number, which is a unique business identification number. Register your company with business credit bureaus such Experian, Equifax and TransUnion, and review your credit reports to discover which of your accounts report positive information to these sources. As you work to build business credit, it is also important to find companies willing to grant credit to your business without a personal credit check or guarantee.
How to Keep Your Business Credit Looking Good
Business credit scores are ranked differently than personal credit scores. On a scale of 1-100, a score of 75 is considered excellent. Most of the advice is common sense. Always pay your bills on time, be the first one to raise financial concerns with a lender and monitor the creditworthiness of your customers and vendors. Consider creating at least a small amount of activity in all credit accounts each month to ensure that files remain active.
FICO made news recently when it announced that business owners who subscribe to Creditera will be able to see FICO's Small Business Scoring Service measurement. This is only one of many measures, including Dunn & Bradstreet’s Paydex scores, and measurements made by Experian, TransUnion and VantageScore, which can be accessed through credit bureaus. It’s not free, so you may want to be judicious about reviewing scores and reports.
Bigger fish need to be aware of a larger financial environment. If you have ambitions for growth this year, it would be good business practice to allocate some time to monitoring this information and developing an attractive business credit profile.
Legally Sound | Smart Business Episode 11