Establishing your company’s credit is just as important as establishing your own personal credit. By establishing your business credit history, you can separate business and personal finances – no longer needing to submit your personal credit profile to qualify for business lines of credit or loans. Also, by having good business credit, you can secure lower interest rates and may even open the door to new financial opportunities.
Why Should You Separate Business from Personal Credit?
When you first start out, you will notice that you have to submit your own personal credit history to qualify for anything. By separating the two, you can minimize negative events on either credit report or how they affect one another. For example, your business is late on a payment; instead of that affecting your personal credit score, it only affects the business. If you have poor personal credit, then you do not want that to hold your business back from success.
A Business is Separate from Its Owners
Unless you are a sole proprietorship, you need to demonstrate that your business is separate from the owners. This is especially important for limited liability corporations. An LLC provides business owners with protection from anything business-related affecting their personal assets. By showing a clear separation with your credit, you can further this protection.
Understanding Business Credit Scores
Businesses have credit scores, too. A credit score for your business is created using three types of information:
- Credit obligations you have to lenders and suppliers.
- Legal filings from the county, state, and local courts.
- Your company background information.
Business credit scores are much more unpredictable than consumer FICO scores. Scores can range from 101 to 816 for credit reporting agencies and 1 to 100 with paid firms like D&B Paydex.
Also Read : Does Bankruptcy Really Hurt Your Credit Score?
The Benefits of Great Business Credit
- You have better payment terms with vendors and suppliers.
- You can reduce how often you have to prepay for new products or services.
- You can get the best interest rates or credit repayment terms from financial institutions.
How Do You Establish Business Credit?
Establishing business credit is not easy. At first, it will require you to use some of your personal credit, but you can slowly break away and start identifying a clear line between your company’s credit, financial liabilities, and your personal financial situation.
To establish business credit, you need a business license and you need to incorporate. Sole proprietorships and general partnerships are the same legal owner; therefore, there is no separation between business and personal. But, if you incorporate your business and form an LLC, you have legally separated personal and business.
Get a Federal Tax Identification Number or EIN
Your federal tax identification number, also known as an EIN, is your business equivalent of a social security number. This number will follow your business around and be used to apply for credit, open bank accounts, etc. You will need this to file your federal tax returns and it is associated directly with your business.
To comply with all IRS requirements, you may need an EIN from your vendors to pay for their services. You can apply for your EIN through the IRS website and some state websites automatically help you apply for your EIN when you apply for your business license.
Open Up Your Business Bank Account
To prove you have a separation between your business and personal finances, you need to open a business account. Open the account using your IRS EIN number as well as your business legal name. Once the account is open, pay all business expenses from that account and accept all income and payments through that account as well. This will help you prove your business transactions. If you have a business credit card, then make sure you also pay that through your business checking account.
Start a Business Phone Number
A business number that is directly associated with your legal business does not start your credit history, but it will help separate your personal and business finances. Instead of sharing one number for both, creditors and financial institutions can now reach you on your business line, proving that you are an established business and not an individual.
Open Your Business Credit File with the Credit Reporting Agencies
To establish credit, you need a credit file. The three credit reporting agencies need to be aware that your business exists. So, contact TransUnion, Equifax, and Experian all to let them know about your business and submit your EIN. Most credit reporting agencies now let you submit your credit file online, but you may have to submit some documentation via fax.
Open a Business Credit Card
The fastest way to establish your business credit is to open a business credit card. You need at least one business credit card that is not personally linked to you, and do not use it for personal expenses. Pick a business credit card that reports to the credit reporting agencies regularly so that you can establish positive credit history as fast as possible.
Also Read : How to Select a Credit Card Following Bankruptcy
Open a Line of Credit with a Vendor
Most vendors offer their business customers a line of credit option. If you can, open a line of credit with one of your suppliers, even if it is a low dollar amount. Vendors will increase the amount of credit you have available once you establish a positive payment history with them. Check to see if they report your payment history and line of credit with the reporting agencies so that you can establish your business credit faster.
Pay Bills on Time and Keep Balances Low
You need to use your line of credit and business credit cards to establish credit history, but you should still keep those balances low. Never max out business credit cards and try to keep your credit utilization below 20 percent if you can. Most importantly, never miss a payment or have a history of late payments on your company obligations. These can severely lower your business credit score.
Also Read : What is the 341 Meeting of the Creditors?
In Over Your Head? Speak to an Attorney About Filing Chapter 11 Bankruptcy
Contrary to popular belief, filing for bankruptcy does not mean your business has to close. In fact, some of the largest companies in the United States have filed bankruptcy to help regain their financial stability.
On the other hand, some businesses cannot recover after a bad bout of credit. If your business is drowning in outstanding debts, have creditors calling and harassing, then your only option may be to file bankruptcy. Chapter 11 will let your company reorganize your debts and get back on track.
Speak to the bankruptcy attorneys at Kelley & Fulton today for a free consultation regarding your potential Chapter 11 case. Call us at 561-491-1200 now.
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