E20 - with Melissa Green of J. Galt
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How do I build credit for my company? How can I avoid putting my personal assets at risk in my company? Credit can be a confusing topic. In this week's episode of Beers with Contractors, we're joined by a pro to walk us through corporate and business credit... what it is, what it isn't, and how to make the most of your company's credit situation. If you aren't using credit to maximize company value and protect yourself, you don't want to miss this episode! Listen Now!
What exactly is business credit? |
Business credit mirrors personal credit in many ways, except it's established using your company’s financial records rather than your individual ones. By cultivating your business credit, you gain the ability to seek out business loans and lines of credit to cover various company expenses such as:
- Office space leasing or purchase
- Equipment acquisition
- Payroll expenses
- Inventory procurement
Businesses are assigned a business credit score ranging from 1 to 100. This scale helps assess the level of risk associated with extending credit to a particular business. According to the Federal Reserve, the business credit score range is as follows:
- Scores 1-10: High Risk
- Scores 11-25: High to Medium Risk
- Scores 26-50: Medium Risk
- Scores 51-75: Low to Medium Risk
- Scores 76-100: Low Risk
Why should you keep your personal and business credit separate?
Maintaining separate business credit protects your personal finances and assets from any repercussions arising from your business activities. For instance, experiencing bankruptcy or defaulting on business loans won’t affect your personal credit score or put your personal assets, like your home, in jeopardy of seizure.
It's particularly advantageous if you have a less-than-ideal personal credit history. Instead of relying solely on your personal credit score, you can establish and nurture your business credit to qualify for loans and credit lines.
Moreover, building business credit can be a quicker and more economical option, especially if you're contending with significant personal debts such as student loans, medical bills, or a mortgage.
What are the advantages of having strong business credit?
In addition to enhancing your chances of securing business loans and credit lines, maintaining good business credit can lead to the following benefits:
- Lower interest rates on business loans
- Ability to order goods or services from vendors without prepayment requirements
- Reduced business insurance premiums
- Higher company valuation
How long does it take to establish business credit?
Establishing business credit requires time and effort, especially if you're starting from scratch. The duration depends on factors such as the type of financing options you pursue (e.g., loans versus revolving credit lines) and how effectively you manage your finances.
For example, you might spend six months to a year consistently making timely payments to vendors and building rapport before seeking a credit line. Then, after another six months to a year of maintaining this pattern, you could leverage your vendor relationships to secure a business credit card or bank loan. Give our podcast episode with Melissa Green a listen to hear her company's one year process.
In essence, it could take up to two years to establish credit for your business. It's important to note that prematurely paying off business loans may impede business credit growth since on-time payments play a crucial role in determining your business credit rating.
How can you establish business credit for the first time?
To kickstart the process of establishing business credit, you must apply for business loans and credit cards that don't mandate a high credit score or extensive credit history. Potential options encompass:
- Secured business loans (requiring collateral, such as business or personal assets)
- Secured business credit cards (demanding a deposit, some of which may be refundable after a specified period of on-time payments)
- Online lenders (often featuring more lenient approval criteria)
- Finance companies (typically necessitating collateral)
Many small business owners gravitate towards online lenders due to their high approval rates. Alternatively, small banks and finance companies, including non-bank lenders like mortgage firms, equipment vendors, insurance providers, and auto financiers, present viable alternatives.
Regardless of the chosen route, follow these steps to initiate the process of establishing business credit:
Register your business entity: Begin by registering your business as a distinct entity. You have several options for business structures, such as Limited Liability Corporations (LLCs), C corporations, S corporations, or Limited Liability Partnerships (LLPs). Commence the registration process by visiting your county clerk's office or website.
Obtain an Employer Identification Number (EIN): After registering your business, apply for an EIN using your company name. The IRS employs this unique identifier to track your business's financial activities for tax purposes. While it's not mandatory for businesses without employees, such as sole proprietors or single-owner LLCs, having an EIN facilitates applying for business loans and credit cards. Using your EIN instead of your Social Security number when seeking business financing helps insulate your personal credit from influencing approval decisions.
Open a business bank account: Maintaining separation between your personal and business finances is crucial. Banks typically request your business profit and loss (P&L) statements, which should exclude personal income or expenses. "The simplest way to establish credit is to open a bank account for your business and apply for a business credit card," advises Richard Clews, founder of an online retail venture. Establishing a business checking account at the same bank where you hold a personal account streamlines the process and may enhance your prospects of securing business lines of credit and loans in the future.
Apply for a business DUNS number: Submit your business details, including your address, business name, CEO/owner information, and legal structure, to the three major business credit bureaus. To initiate this process, apply for a DUNS (Data Universal Numbering System) number. This identifier is relied upon by local and international suppliers and creditors to evaluate businesses' creditworthiness. Upon submitting your application, you should receive the DUNS number within 30 days.
Apply for a business loan, credit card, or line of credit: Begin by exploring secured credit cards and loans, which are accessible to businesses with subpar or limited credit histories. These financial products are tailored to businesses seeking to establish or rebuild credit. Consult your credit union or bank to explore available options. If their offerings don't align with your preferences, consider seeking financing from online lenders or financing companies. Leveraging your existing relationship with your personal bank may also increase your chances of securing a business line of credit.
Establish trade lines with vendors and suppliers: Building business credit extends beyond interactions with major financial institutions. Forge relationships with third-party vendors and suppliers and inquire about establishing lines of credit. This arrangement allows you to procure inventory, supplies, or other goods with the commitment to pay at a later date, typically within 30 days (NET 30).
