As an entrepreneur, did you know you have a unique opportunity
to build, maintain and acquire credit both individually and
as a business owner? That's good news if you're trying to
build and grow a company because you won't have to rely solely
on your personal credit to do that.
As a member of the business credit industry, it's been my
experience that fewer then 10 percent of all entrepreneurs know
about or truly understand how business credit is established and
tracked-and how it affects their lives and businesses.
So let's first take a look at how personal credit differs
from business credit. Then we'll discuss some steps you can
take to build your business credit.
Personal Vs. Business Credit
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At the point an individual with a social security number accepts
their first job or applies for their first credit card, a credit
profile is started with the personal credit reporting agencies.
This profile, otherwise known as a credit report, is added to with
every credit inquiry, credit application submitted, change of
address and job change. The information is typically reported to
the credit bureaus by those who are issuing credit. Eventually, the
credit report becomes a statement of an individual's ability to
pay back a debt.
In some cases, the same is true for businesses. When a business
issues another business credit, it's referred to as trade
credit. Trade, or business, credit is the single largest source of
lending in the world.
Information about trade credit transactions is gathered by the
business credit bureaus to create your business credit report using
your business name, address and federal tax identification number
(FIN), also known as an employer identification number (EIN), which
you get from the IRS. The business credit bureaus use this compiled
data to generate a report about your company's business credit
transactions. In many cases, those issuing credit to you will rely
on your business credit report to determine if they want to grant
you credit and how much credit they'll give.
The major business credit bureaus that compile and provide
copies of the reports are:
- Dun & Bradstreet
- Experian Business
- Equifax Business
- Business Credit USA
Unfortunately, because the information provided to the business
credit bureaus is sent in voluntarily--no business is
required to send it in--the credit bureaus may never receive
all or even any information about your business credit
transactions. In fact, you could go for years racking up business
credit without any of it being reported to the credit bureaus.
Establishing Business Credit
Let's start by talking about your business credit score.
Business credit scores range on a scale from 0 to 100 with 75 or
more considered an excellent rating. Personal credit scores, on the
other hand, range from 300 to 850 with a score of 680 or high
considered excellent.
It's important to note that there are many factors that
affect a credit score; it's based on more than just whether you
pay your bills on time. Your score can be affected by the amount of
available credit you have on bank lines of credit and credit cards,
the length of time you've had a credit profile, the number of
inquiries made on your credit profile and more. You can find out
more about what factors affect your credit rating by visiting
www.myfico.com.
The mistake many business owners make is using their personal
information to apply for business credit, leases and loans. By
doing so, they risk having a lower personal credit score.
Why is that? The average consumer credit report gets just one
inquiry per year and has 11 credit obligations, typically broken
down as 7 credit cards and 4 installment loans. Business owners are
not your average consumer, however, because they carry both
personal and business credit. This typically doubles the number of
inquiries made to their personal credit profile and the number of
credit obligations they carry at any given time, all of which
negatively impact their personal credit score. And because business
inquiries and personal inquiries aren't separated on their
personal credit report, the scores, again, is negatively affected.
At the same time, by using their personal credit history to get
business credit, they're not able to build their business
score, which could help them attain critical business credit in the
future.
The key to establishing a business credit profile and score is
to find companies that will establish credit for your business
without using your personal credit information and then report the
payment experiences to the business credit bureaus. By reporting
the information to the proper agencies, they'll help you
establish your business credit profile.
The following are the basic steps you need to take to establish
your business credit profile and score:
1. Form a corporation or LLC to operate your business under
and obtain an FIN or EIN from the IRS. You can apply for an EIN
number at the IRS website.
I'm suggesting you form a corporation or LLC as opposed to
structuring your business as a sole proprietorship or partnership
because with a sole proprietorship or partnership, your personal
credit information could be included on your business credit
report--and vice-versa. In addition, as a sole proprietor or
partner in a partnership, you're personally liable for the
debts of the business and all your personal assets are at risk in
the event of litigation.
Corporations and LLCs, on the other hand, afford business owners
liability protection, and you can build a business credit profile
that's separate from your personal debts. You may be able to
apply for credit under your business's name and obtain credit
without a personal credit check or guarantee if the credit grantor
will do so--and it's been my experience that often all you have
to do is ask.
2. Register your company with the business credit
bureaus.
3. Comply with the business credit market requirements.
It's extremely important for businesses to meet all the
requirements of the credit market in order to ensure a higher
likelihood of credit approval. In fact, not being in compliance
with the credit market can raise red flags with both credit bureaus
and grantors. The red flags include such simple things as not
having a business license or a phone line. Most businesses will not
grant credit to another business that hasn't taken the steps to
set the company up with the proper licenses and local, state and
federal requirements. You can research the list of business credit
market requirements at iBank.com.
4. Prepare financial statements and a professional business
plan. These documents are often required by many credit
grantors.
5. Find companies willing to grant credit to your business
without a personal credit check or guarantee.
When a company grants your business credit, be certain they
report the payment experiences you have with them to the business
credit bureau to help build your business credit report and a
financial foundation for your company.
6. Manage your debt so you don't fall into trouble making
your payments, which will negatively affect your credit
score.
7. Make monthly payments to credit grantors to keep your
business credit profile active.
At some point, almost every business needs some type of credit.
To avoid having to use your personal credit history or guarantees
and to obtain the best possible terms, start the steps necessary to
build a business credit profile now before you really need it.
David Gass is the president and owner of Business Credit
Services Inc., a Las Vegas-based company that provides credit
coaching programs for small-business owners to help them build
their business credit. Obtain a free business credit assessment by
calling (866) 254-6076. Or go online to www.corporatecredit.biz to get a copy of their free
booklet Building Business Credit for Business
Owners.