Steps To Great Business Credit
If cash is king... then credit is god.
If you are not yet aware of the power of business credit this article will shed some light on how to leverage credit in your business.
The primary reason any entrepreneur should aim to build a solid business credit profile is to separate personal and business finances. As a funding source, Trustart Financial has seen many entrepreneurs sacrifice their personal credit profile to fund their business. While some personal liability is always expected, your goal as a strategic entrepreneur should be to build a solid business credit profile not only to separate your liability but also to achieve higher limit credit lines and loans.
Did you know that a business credit profile with no reporting accounts automatically constitutes as a failing credit report?
That's right! this is why so many business owners are declined for business funding without even knowing about it! Business credit is judged much like a personal credit profile, however, instead of scores ranging from 400 - 850, business credit is based on a 1-100 PAYDEX score. Your Paydex score is simply judged on how you service your debts. If you pay the minimum payment and you pay on time you will usually have a score above 80.
In addition to separating your personal finances from your business, you are also separating your utilization! Since utilization is not factored on your business credit you are able to use your credit lines and loan fully without being penalized for it. Anytime your personal credit profile goes over 10% utilization your scores start to drop. This is the number one reason so many entrepreneurs have bad personal credit.
So this all sounds great.... but how do you build your business profile?
The steps we have outlines below are a simple overview on how to build a solid business credit profile. You should be aware that there are many short cuts and loop holes to building business credit and if you are seeking a deeper understanding Trustart Financial has a business credit building course available to our clients.
How to build business credit:
Step 1: Set up your corporate entity correctly and credibly.
This step is the foundation to your success in establishing a proper business credit profile. Many business owners overlook the small details that are inevitably going to be caught by an underwriter before a loan approval.
In this step you must:
-Establish your corporate identity (LLC, S-Corp, C-Corp, etc...) with the state you do the most business in. Make sure to avoid a name that reflects you are in a high risk industry such as a law firm or a car dealership. underwriters will automatically flag your application in this case.
-Set up your EIN # with the IRS.
-Make sure your domain name and email match.
-Set up any business licensing needed for your industry and state.
-Set up physical or virtual address.
-Get a business toll free number and list it with 411. This number must be listed locally with 411 in their directory system.
-Make sure there are now discrepancies in your business information.
Step 2: Business Credit Reports
Business credit reports reflect on Experian, Equifax, and Dun & Bradstreet.
Below are links for you to check your business credit reports from each credit bureau.
Equifax Small Business takes more time to create a file than D&B and Experian. This is because only a few vendors and creditors actually report to Equifax, most of them report to Experian or D&B. This is also why it’s important to apply with the credit providers who report to Equifax when you find them. You can get setup for Equifax credit monitoring for as little as $19.95 monthly and Dun & Bradstreet reports are $49 monthly.
Step 3: Getting Vendor Credit
Your business credit profile can be built up just like your personal credit report. Starting with small initial credit accounts allows you to build a solid foundation for your business credit profile and obtain higher limits in the future. These types of accounts are typically referred to as "vendor credit". These vendors will issue a Net 15, 30, 60, 90 day terms on your business profile without having any previous credit accounts reporting on your business EIN.
Building initial vendor credit starts with vendors such ass Quill and Ulines, you can purchase office supplies and other goods from these vendors to start building initial credit. Remember to only list your business EIN number on the application even if a vendor requests your social security number. If you business credit is strong enough, the vendor will extend you credit.
When your first Net 30 account reports your "tradeline" to Dun & Bradstreet, the DUNS system will automatically activate your file if it isn't already. This is also true for Experian and Equifax.
You should have atleast five (5) accounts reporting to your business EIN as "tradelines" before moving forward to the next step.
Step 4: Getting Revolving Credit Lines
Once you have established your five vendor accounts you can move on to revolving accounts. These accounts allow business owners to hold a balance without paying off the full amount at the end of the month.
You will start out by building revolving accounts with major retailers before moving on the revolving credit lines like Visa, Amex, MC type cards. Some business owners may get declined upon applying for store credit because all five Net accounts have not yet reported to their business EIN, It usually takes about 90 days for all vendor accounts to report to the credit bureaus.
Most major retailers will offer business credit accounts even if they do not advertise it. Some of the major retailers offering these accounts are:
You want to have five (5) of these revolving accounts reporting to your business before moving forward to the next step. Remember to check your credit profile before applying to ensure all your tradelines are reporting in good standing.
In total you will have ten (10) tradelines reporting before getting into the steak and potatoes... Bank credit lines! It is expected that this process will take 6 to 12 months to obtain traditional credit lines with banks.
Business credit offers leverage to any business owner. Since business credit lines are intended for business purposes, limits can be up to 100x more compared to a personal credit line. Many entrepreneurs make the mistake of funding their business using traditional credit lines that are personally guaranteed by them!!
No. No. No.
A business and its owners should always have their finances separate, With the amount of uncertainty in today's economy, personally guaranteeing business debts is risky.
This brings us to our next topic,
What if we need funding for your business now?
Fortunately, there is a way to get around the 6 to 12 month wait time for obtaining bank credit accounts. Trustart Financial offers a business credit card program that can build up your credit accounts in less than 30 days!
Here's how it works...
The business credit card program uses a business owners personal credit profile to base their lending decision on but it reports to their business EIN.
The utilization and debt to income will be factored on to the business credit profile rather than the business owners credit profile.
This allows business owners to get fast working capital all while building their business credit profile for future larger account limits. These corporate credit cards can be cashed out and most lenders offer a 0% interest introductory period of 6 to 18 months. This program acts like a foundation for business owners, since the majority of corporate credit cards do not require income statements its perfect for start-up's and businesses with low cash flow.