As a business owner, are you looking for asset protection? That does not necessarily mean insurance, though insurance is definitely important.
Good, established business credit can also help you with personal asset protection. But, what is business credit and how do you get it? Then, how on earth do you use it for asset protection?
What’s Business Credit, Anyway?
Business credit is credit in the name of a business. More than anything else, it signifies how well a business pays its bills. With good business credit scores, your company will get better credit terms and more financing opportunities.
Good business credit relies on putting together a company with the right foundation to build credit for itself. We call it a Fundability Foundation™. Building this foundation has to be intentional. Business credit does not build passively like consumer credit does. Let’s look at some of the highlights of this type of foundation.
Your Legal Business Name and Contact Information
It all starts with your business name. Picking the perfect name is about more than picking something clever. It is the first thing most people, including lenders, will know about your business.
Business Name and Risk
Yes, the name of your business affects your ability to get funding.Be certain it does not indicate that your business is one that is risky. If you are opening a business that is considered to be high risk by the lender, for example a travel agency, do not name it “Carla’s Travel Agency.” You can name it Carla’s, or anything else that does not make it obvious that this is a high risk business.
Honestly, it’s just a way to ensure that you make it as far into the process as possible without being denied for funding. Depending on the lender, they could deny immediately if they can see at a glance that the business is in a high-risk industry.
Business Phone Number
Your business phone number should be toll-free and listed in the 411-directory. Do not use your personal phone number as your business number.
The actual physical location of your office doesn’t matter as much as the business address. Lenders want to see a physical address where you can receive mail. That means no P.O. Box or UPS Box.
To be legitimate in the eyes of lenders, a business needs to have all of the necessary licenses to operate legally at all levels. Research to ensure you have all of the licenses necessary.
Your Business Phone Number
You need a dedicated, separate number for the business only. It should be toll-free and listed in the 411 directory. Voice Over Internet Protocol (VoIP) is fine, and you can forward your business number to your personal phone or cell phone if you want. Do not use your personal number as your business number.
Your Business Structure
Incorporating your business as an LLC, S-corp, or corporation is necessary. Not only does it lend credence to your business as one that is legitimate, but it also offers some protection from liability.
Which business structure option you choose does not matter as much for Fundability™ as it does for your liability protection and budget needs. The best thing to do is talk to your attorney or a tax professional.
Your Business Bank Account
You have to open a separate, dedicated business bank account. A business checking account is best. Not only will this help you keep track of business finances, but it will also help you keep them separate from personal finances for tax purposes.
Some vendors and credit card companies require a separate business account for approval. Furthermore, you cannot get a merchant account without a business account at a bank. That means, you cannot take credit card payments. Since studies show consumers often spend more when they can pay by credit card, being able to accept payments via credit card is important.
How Does a Good Business Credit Score Help With Asset Protection?
Establishing business credit makes a difference when funding a small business because it allows small business owners to protect their personal credit. When funding a business with consumer credit, personal assets are at risk. If the business fails, the owner personally has to make the debt good. This means cash, investments, even their home is at risk.
With business credit, you can get accounts that are in the name of the business only. The more of these you have, without personal guarantees, the better you can fund your business without having to worry about your personal assets and finances when you borrow money.
The Higher Business Credit Limit is Crucial
The limit you will have on a typical business credit card is often much higher than that for a personal credit card. With more buying power, you can get more of what you need without putting personal assets at risk.
Credit Utilization on a Business Credit Card vs. Personal Credit Card
It also helps protect your personal credit score. Personal credit is negatively impacted by your credit utilization ratio. That means the more available credit you carry a balance on, the lower your score drops. When you take into account that personal credit cards typically have lower limits, and business expenses are almost always large, your balance could stay close to limits monthly even with regular on-time payment. In turn, your personal score is continually negatively impacted.
In contrast, credit utilization does not have as much of an effect on a business credit score. Along with the higher limits, it really isn’t a big deal to have high balances on these cards as long as you make regular on-time payments, or better yet pay early. As a bonus, your personal credit stays intact.
Making your business purchases with a small business credit card will also help you establish business credit. That is, if it reports to the business credit reporting agencies. It’s a win-win. You can better manage business cash flow while you build business credit at the same time.
Vendor Business Credit Cards
Credit card companies aren’t the only place to get small business credit. A proven way to establish credit for your business is with vendor accounts. With little effort, you can get small business credit cards from starter vendors.
Some starter vendors extend net terms rather than credit cards. The key is, they do so without a credit check. Then, they will report those payments to the business credit reporting agencies.
This is the absolute best way to establish and build business credit while funding your business at the same time. You can buy what you need without using personal funds. Better yet, the stronger your business credit score gets, the more you will be able to qualify for.
While good credit scores aren’t a necessity for accounts with starter vendors, they do require a Fundability Foundation™. That’s why the foundation is so vital to building credit for your business. In addition, they may require a certain annual or monthly income, a minimum time in business, an average balance in a business bank account, or any number of things. The point is, you can get these accounts without already having business credit and without using your personal credit.
The minimum time in business for some is less than a year. As a result, this is even an option for a new business in some cases.
Better Business Credit Scores Now Can Help You Get a Business Loan in the Future
You will be able to borrow money based on how your business is doing, and on your good business credit, without putting your house on the line. Keep your personal assets safe by not tying them up in your business. This is almost impossible to do without business credit.
Maintain Good Business Credit By Monitoring Business Credit Reports
The major business credit bureaus are Dun & Bradstreet, Equifax, and Experian. FICO SBSS is playing an increasingly larger role as well.
To help improve your business credit score, it pays to check each business credit file with the business credit reporting agencies. Make sure it is accurate and complete. Start as soon as you open a business if you are not already operating. That way you can keep an eye on things from the beginning.
Inconsistency Indicates Fraud
Business information must be consistent across all platforms. So if either a loan application, web site, insurance document, and business credit profile lists a name or address even just a little differently, you may not even make it to financial underwriting. It is considered a red flag for fraud. Most lenders will not investigate why a difference is there. They’ll just deny the loan and move on.
Even the tiniest details, such as using an ampersand in one place and the word “and” in another can cause this type of issue. Make sure also that if your business address or phone number changes, you update it everywhere.
Once your business entity and other information is correct with all of the business credit agencies, you should get your business credit report from each of the business credit bureaus. The business credit agencies can make errors. One part of building business credit is protecting any small business credit score you’ve already got.
Now, you can do this directly with each bureau except FICO SBSS. However, Credit Suite offers business credit monitoring with the big three for a fraction of the price. FICO SBSS is a different animal. Two different lenders could get a different score from them for the same business at the same time.
That’s a result of the fact that lenders can choose how each factor in the calculation is weighted. So, one lender may put more weight on business credit payment history, and one may weigh personal credit more heavily. The result is two different scores for the same business.
Your Personal Credit Can Affect Your Business Credit
Did you catch that? Your personal credit can affect your business credit, though the reverse is generally not true. Good credit on the personal side can help a small business. This is particularly true of your business credit reports at Experian and FICO SBSS. They both use personal credit history and scores in their business credit calculation.
That means if your personal credit isn’t great when you open a business, you need to work on improving it as you build business credit. This will go a long way toward opening you up to better business financing options, especially from banks, in the future.
Business Credit of All Types Can Help Protect Your Personal Assets
Whether it’s a business credit card or a vendor account, using business credit for business purchases will help protect your personal assets. If you start as soon as you open a business, you’ll be better off. However, it’s never too late to start. Contact Credit Suite today to get started.