In the past during good economic times you may have become accustom to using personal credit cards to finance purchases, equipment, and even payments to suppliers or vendors when starting and operating your business.
Unfortunately times have changed for business credit for small business and what has become a shocking reality to many are the ramifications of what the co mingling of personal credit files for business financing has resulted in.
Many small business owners who have followed the traditional route of personally guaranteeing each and every credit card, business credit line, or loan for business have come to realize that they have put their personal assets and family at risk!
The single greatest challenge during these tough economic times facing small business in America is adapting to change. Less than ten percent of business owners in America know how to truly separate their personal credit from business credit let alone understand how to set up a business credit profile an establish a good rating.
So what is business credit?
It’s the ability to obtain financing under the name of your business entity without using your personal credit or personal guarantee. Business credit should be separate and based on the corporation’s credit worthiness not yours! Recently Entrepreneur Magazine was quoted as saying “You should differentiate your personal credit from your business credit.”
If you own a separate legal entity for your business than you have a unique opportunity that no other individual or sole proprietor has. It’s the ability to establish a business credit profile that is completely separate from a personal credit profile.
If you think you’re business is just making it fine despite the current economic times and you don’t need the credit think again! The reality is that your business will at one point require an influx of cash in order to cover unforeseen operating expenses, development, expansion, legal fees, inventory or a range of other items that a business may require in order to grow.
One of the key advantages when you start business credit building is instead of putting your personal credit and assets at risk every time your company requires financing you would now be in a position to secure the financing you need with your businesses’ credit. Some other benefits you can expect include...
...any debt you accumulate for the business would only report to your business credit file not your personal credit file.
...eliminating the co-mingling of funds--and this includes the "co-mingling" of credit profiles so you won’t jeopardize the protection of the corporate veil.
...protecting you and your family from personal liability when you get approved solely on your businesses' credit file.
...improving your personal debt to credit limit ratios by transferring the balances of business debt used with your personal credit to your business credit.
...increase your businesses’ ability to obtain cash credit 10 to 100 times greater than you can obtain personally.
SAVING MONEY! For example, an individual might pay up to 13% interest on a $100,000 business line of credit whereas a business could qualify for an interest rate of 7%. That would save you almost $40,000 in interest alone.
So how do you get started?
Setting up and establishing business credit for your business can be broken down into eight steps:
- Corporate Conformity – This is where set up your business entity whether it’s an S-Corp, C-Corp, LLC or Limited Partnership. This is the foundation part of your business credit so taking short cuts or side steps can result in poor ratings and reduce your chances for funding.
- Business Plan – This is not a mandatory step, but it’s necessary for your overall business success as well as a door opener for some specific lenders.
- Business Credit Profile - Once you have completed corporate conformity you'll be ready to set up your business credit profile with Dun and Bradstreet. (The next 3 steps have to do with trade accounts also known as vendor credit lines. There are over 500,000 vendors extending credit to businesses, but less than 6,000 of them report your payment history to your business credit profile. Choosing the right vendors is also a critical part of the process.)
- Tier 1 Trade Accounts – This is the first step where you set up trade accounts for your business that are known to grant small amounts of credit to businesses that have no credit history.
- Tier 2 Trade Accounts - At this point you set up business trade accounts for your business that are known to grant credit to businesses that have little business credit history. Because most Tier 1 accounts will now be reporting on your business credit profile you can now apply for Tier 2.
- Tier 3 Trade Accounts - These companies will grant credit in higher amounts than what was granted from Tier 1 and Tier 2 accounts.
- Tier 4 Cash Credit Accounts – Tier 4 accounts consists of creditors who will grant your business cash credit cards, typically with a Visa or MasterCard logo. Benefits at this step include no personal guarantees and impact on your personal credit profiles.
- Advanced Business Financing - At this stage of the process your business credit file is built, you have history, business scores, rating; access to funding and you can continue to obtain even larger amounts of financing by following some advanced business credit building strategies.
After the recent economic downturn small business owners like you are facing a new era when it comes to business financing. Banks, lenders, suppliers, leasing companies and others are making adjustments, adopting new rules, and facing new regulations in the lending arena.
Now more than ever you need to accept this new reality and be pro active by establishing a new level of financial preparation which includes establishing a strong business credit profile, a favorable business credit rating, and a solid bank rating. I encourage you to start building business credit today and enjoy the benefits and peace of mind that comes with it!
Marco Carbajo is founder of Start Business Credit.com
You may contact Marco directly at: ceo@startbusinesscredit.com
Follow Marco on Twitter @MarcoCarbajo and read more of his insights on BusinessCreditBlogger.com
