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Business Credit: Its Not Personal
When your business experiences or anticipates big growth, it will impact every area of business. Big growth means big changes. In addition to the logistical and management issues that come up, it's also likely that you'll need to raise some (or a lot) of money.
When the time comes to borrow money to grow your business, it's essential that you approach a bank with the best possible chance of being approved. The best way to do that is to assure that your business has good business credit. Notice that we used the term "business credit" not "personal credit." This is an important distinction that some business owners don't fully appreciate.
One of the skills that every business owner needs to learn as a part of growing a business is to look at the business as something separate from yourself. You own a business. But you are not your business. And one of the most important places to practice this mindset is by separating business and personal finances.
Our recent poll question addressed this issue, asking "To what degree are your business finances separate from your personal finances?" Here are the results from 1428 respondents:
- 33% - Complete separation
- 26% - Finances are mixed
- 21% - Very little mixing of finances
- 17% - Moderate separation, some mixing
- 3% - Don't Know
Personal Credit
As a business owner, you've already gone through the process of building good personal credit. Perhaps you used personal credit to set up your business; if so, it should Stop There. Using personal credit to fund a business is a losing proposition which puts an owner at risk of damaging his or her personal credit score.
If you use personal credit to secure money for business, you reduce your personal credit score with each inquiry made by each bank for each loan request. If you use the credit, the business debt appears on your personal credit report, increasing your debt-to-income ratio and lowering your personal credit FICO score.
And consider: personal credit is attached to your social security number (SSN). Any outstanding debts incurred by your business will follow you, even if you are no longer in business. Therefore, establishing a line of credit under your business tax ID number instead of your SSN can be extremely important.
Business Credit
Your chances of obtaining business financing can increase by more than 250% if you have business credit, and building business credit can protect you from business liabilities, as business credit may not require an owner's personal guarantee. An owner with good business credit can also increase his or her chances of getting a attractive interest rate if ratings with the five main business credit bureaus are good.
A business credit profile can be established for common C-Corporations, S-Corporations or an LLC, which are all businesses based on tax ID numbers. Note that sole proprietorships are typically based on the owner's SSN and are not recommended for building business credit.
Create Good Business Credit
Like good personal credit, building good business credit takes time and requires many steps. And since there are no laws protecting business owners from business credit bureaus, it is imperative to set up business credit properly. Here are some points:
- Don't buy business credit from companies offering to sell trade references. Not only can this be an expensive rip-off, but should a credit bureau find out you've taken this approach, you risk having your business labeled "High Risk". And it is extremely difficult to remove "High Risk" status from your business credit profile.
- An important goal is to obtain a paydex score, and your business will need at least five trade references in order to obtain paydex score. Therefore, make sure you're working (and spending) with companies that will report your good payment history to the business credit bureaus. If your good payment history goes unnoticed, you won't get those good trade references.
Corporate Credit Concepts
Building good business credit requires patience, diligence and dedication. It can also help to have an ally; a company that makes it easier to safely establish business credit.
Our partner company Corporate Credit Concepts is one which will work with you to build business credit so that your company will have more freedom to grow. They have a proven system for building business credit and will provide you with a free credit building report.
Visit Corporate Credit Concepts to learn more.
Comments
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Tim C. says:
Good info, Business credit is a must for small business owners, we also must keep it separate from personal credit.
Submitted Nov 7, 2008 6:56 AM
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Daniel H. says:
I'm in the Corporate Credit Concepts program now. It actually only took me 3 lines to get a Paydex score, but even so it's a great program. Lots of personal attention and lots of good strategies to learn.
Submitted Nov 7, 2008 8:16 AM
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Elizabeth H. says:
I am a sole proprietor...I am not sure how to keep by business credit separate from my personal other than separate bank accounts. As a start-up business, two credit accounts recently opened for my business is in my personal name. Any suggestions?
Submitted Nov 7, 2008 9:26 AM
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Vi W. says:
One thing that I have recently learned is that even if all of your finances are separated by accounts that a business credit card can reflect on your personal credit.
Even under your business name, if the card has your name on it, it is tied to your credit.
For Elizabeth - I would recommend opening up new accounts under the business name as soon as it is feasible.
Thanks,
Vi Wickam
President
Principal Web Solutions
http://www.PrincipalWebSolutions.comSubmitted Nov 7, 2008 10:54 AM
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E-Myth Business Coach says:
Elizabeth H., Having separate bank accounts is a great start! As for the credit accounts, get a business credit card. Now, when you talk to your bank about business credit accounts, you may want to have with you business bank statements and P&Ls (profit and loss statements, a.k.a. income statements) going back a few years.Submitted Nov 7, 2008 11:34 AM
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Lourdes D. says:
I also have a separate bank account for my business and my business credit card has the company name and my name on it. Are you saying that I should ask for one that doesn't include my name?
Submitted Nov 7, 2008 4:06 PM
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Billy B. says:
Your business credit card will nearly always have someones name on it so that is not the process. In fact, anymore, for a small business to acquire much CASH credit (meaning a credit account you can use anywhere or even put cash in your bank such as lines of credit and balance transfers) you will have to utilize a personal guarantee. I compare it to "co-signing" with your business on the loan but the line itself will not show up on your personal credit until you default. The world of non-personally guaranteed cash credit for small businesses is dying (unless of course you fool the banks into thinking you are actually a large business, but that it what we call fraud in 99% of cases).
Submitted Nov 8, 2008 7:33 AM
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orang k. says:
I completely agree, & I also conduct my business financial totally separated from my personal finance. Talking about loans/credit, the only credit I get frm Bank or Leasing Company is used for financing my business needs such as : buying new truck or new food production machine (I am snack food business). It is not that I havent got enough fund to buy those things, but I practicing the use of OPM (other people's money). As long as it is used for productive purpose, there is nothing to be worried, as you can see that all of the things I bought are generating more revenue for the business. But if it is for comsuming purpose such as buying new furniture or Home Theater ..you got a Problem :)
By the way thanks for the article. Cant wait to get another soon
Submitted Nov 9, 2008 5:42 AM
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Trent L. says:
Lots of great comments here! I did want to comment on a few items:
From Vi W.
"One thing that I have recently learned is that even if all of your finances are separated by accounts that a business credit card can reflect on your personal credit.Even under your business name, if the card has your name on it, it is tied to your credit."
Great point about your personal credit being tied to your business credit card, meaning there will be a personal guarantee required. The important part of this is that even if you personal guarantee (in the beginning most will need to) if you set up your business credit properly, the business credit card will not report on your personal credit report. therefore, not harming your personal finances.
this is important, and this is how you start separating your personal credit from your business credit.Comment from Billy B.
yes, the banks are getting tighter on lending without a personal guarantee, but there are still credit cards that you can obtain without a personal guarantee (no name on the card, just a company name), there are still loans, vehicles, equipment, etc that you can get wihout a personal guarantee. Dont get me wrong, i am all for not personal guaranteeing when you can, but the point is, even if you have to personal guarantee as long as it doesnt report to your personal credit report.
thanks for all the great comments!
Submitted Nov 10, 2008 12:13 PM