While many small business owners realize the benefits of starting business credit there are many mistakes that are made in the business credit building process. I have compiled a list of my top 10 most common mistakes that can serve as a helpful guide to you as you begin building business credit for your business. Here they are…
1) Choosing the wrong entity structure
Selecting the right entity structure for your business is the most important step you can make. Not just from a business credit standpoint but also from a tax and asset protection standpoint as well. In addition there are state filing fees, franchise fees, licenses, resident agent service and a host of other important factors to consider.
2) Selecting the wrong SIC code
There are certain codes that the business credit bureaus and lenders tend to stay away from. These industries include real estate investing, car sales, adult entertainment, travel, lending, restaurants, and dry cleaners. When you classify your business be sure to stay away from these classifications.
3) Selecting the wrong NAICS code
If you plan on investing in real estate then you will want to make sure that the company you build credit on is not “real estate investing”. Most banks will automatically turn you down because this is a high risk category. You still will be able to invest in real estate but you may have to set up a business that does business development, business consulting, marketing & advertising, training and development, etc. and then operate your real estate investments from a separate division or company that does something else.
4) Using a home or cell phone number as a business phone number
There’s nothing wrong with using these phone numbers but when it comes to building business credit it does matter. Your number has to be listed in the 411 national directories and cell phones and VOIP as well as call forwarding numbers do not work.
5) Having inconsistent information on business documents
When building business credit you must pay close attention to details. The information used to open your credit file must match the information you use on applications, documents, and filings.
6) Applying for credit with the wrong vendors
There are 500,000 vendors in the U.S. that extend credit to businesses but less than 6,000 report to the business credit bureaus. Too many make the mistake of believing that simply doing business with a vendor will result in establishing business credit. Not true!
7) Applying for credit with vendors that report slow
There are vendors who do report your payment history but only on a quarterly or even yearly basis. Time is of the essence so you have to make sure the vendor you apply with also reports to the business credit bureaus on a monthly basis!
8) Applying for personal credit cards disguised as business credit cards
Pay special attention to what a credit card application requires and what the terms and conditions are. A credit card that reports only to your personal credit is not a true business credit card .
9) Applying for business credit cards that do not report to the business credit bureaus
There are over 500 business credit cards available in the marketplace but less than 70 report your payment history to the business credit bureaus.
10) Not establishing an effective bank rating
A minimum of a low 5 bank rating is a must if you plan to apply for small business credit lines or loans. You can achieve a low 5 rating with a $10k balance in your account.