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Separating Business and Personal Credit

Published By Janet Gershen-Siegel at October 23rd, 2017

Need to Start Separating Business and Personal Credit?

No matter how big or small your business is, you have to get serious at some point. And that means separating business and personal credit.

Whether you have a new business, or you are now involved because you obtained one or have suddenly become an owner or a manager here are 7 reasons you should certainly develop your corporate credit.

Separate Your Business Credit From Personal

Even if you are a sole proprietor (let’s say you sell a specific thing handcrafted by no one but you), it will still pay off, big time, for you to set up a financial boundary between your individual credit and your corporate credit.

Why? Because keeping a barrier means that your personal credit will not be impacted by your company credit. You don’t stand to lose a car, for instance, in the event that your small business enters receivership.

Establish a Credit History Before You Really Need to Tap it

For the big credit reporting bureaus, credit history is just one of the components they use when calculating your business credit score. The longer (and better) your credit history, the better your small business’s credit score is going to be. This is true for Experian, Equifax, and Dun and Bradstreet. You know, all the places you know of where to check a business credit score.

When you take into consideration what credit score needed for a business loan, then you really need every bit of your credit score you can get. If you start early, it can only help you.

Prepare for Lean Times

You may not prefer to think about it, but there are going to be periods when the work runs out. If you are in a seasonal business, then this is a part of the DNA of your business. But every firm can endure leaner times.

If you have to make payroll or equipment payments, or pay the rent, you’ll need business credit just to get by. And by developing your business credit before you really need it, you are more likely to get superior terms– or maybe credit at all.

The IRS Says You’re a Firm (or Perhaps Even a Corporation). Now Start Acting Like One

What does this mean? If you have been responsible and established your business with an EIN (employer identification number), then eventually in the process you had to announce to the Internal Revenue Service that your small business is, truly, an authentic business. And it’s not just a hobby or such.

Thus, the IRS is presently treating you and your small business separately when it comes to tax liability. Thus, if you’re still floating interest-free loans to your business with your consumer credit cards, stop. Because now is the time to cut that out.

Trade Credit is a Wonderful Thing and You Should Use It

What is trade credit? It’s where you work straight with a local supplier so as to create a relationship through which you can have a small loan (that is, credit) floated to you.

This is for the kinds of things you need at all times. A freelance writer needs flash drives and printer ink and potentially pens and paper. A plumber needs lengths of pipe. A carpenter needs nails. And basically everybody needs coffee.

This is where to establish business credit!

When you build a trade credit connection, you also open the door for other sorts of relationships. By helping a local business, you support your community. Furthermore, you never know who will introduce you to your next client.

Business Credit Means You Can Ultimately get Bank Loans for Your Company

In some cases, a business opportunity is simply too advantageous to pass up, and you need to act quickly. This may possibly be anything from purchasing realty at auction to buying the machinery owned by a business going through reorganization. Or it could be putting in a bid on resources when they reach their best price for the year.

But you may not have that sort of funds on hand. Developing business credit means that bank loans will be granted more quickly and with better terms. You will be able to benefit from these opportunities, and seize them when they are still relevant.

Without having business credit, despite the fact that you get a loan, it will inevitably take longer. And somebody else might grab those low-cost raw materials or outbid you when it comes to prime real estate.

But Separating Business and Personal Credit Has Its Own Advantages

Don’t just build business credit for the sake of ticking off a box. And don’t just establish business credit to get loans. Business credit is valuable unto itself. Here’s how to build it.

The Process

Growing business credit is a process, and it does not occur without effort. A company needs to proactively work to build corporate credit. Nevertheless, it can be done readily and quickly, and it is much swifter than developing personal credit scores. Vendors are a big aspect of this process.

Undertaking the steps out of order will result in repetitive denials. Nobody can start at the top with company credit. For instance, you can’t start with store or cash credit from your bank. If you do you’ll get a denial 100% of the time.

Company Legitimacy

A company needs to be reliable to lending institutions and merchants. As a result, a small business will need a professional-looking web site and email address, with site hosting bought from a vendor such as GoDaddy. And business telephone and fax numbers should have a listing on 411.com.

Likewise the company phone number should be toll-free (800 exchange or comparable).

A business will also need a bank account devoted solely to it, and it needs to have every one of the licenses essential for operation. These licenses all must be in the identical, correct name of the small business, with the same business address and telephone numbers. Note that this means not just state licenses, but potentially also city licenses.

Dealing with the IRS

Visit the Internal Revenue Service website and get an EIN for the small business. They’re free. Choose a business entity such as corporation, LLC, etc. A business can begin as a sole proprietor but will probably wish to change to a variety of corporation or partnership to minimize risk and take full advantage of tax benefits.

A business entity will matter when it comes to tax obligations and liability in case of a litigation. A sole proprietorship means the business owner is it when it comes to liability and tax obligations. Nobody else is responsible.

If you operate a corporation as a sole proprietor at least file for a DBA (‘doing business as’) status. If you do not, then your personal name is the same as the corporate name. Because of this, you can wind up being directly responsible for all small business debts.

Additionally, according to the IRS, by having this structure there is a 1 in 7 chance of an IRS audit. There is a 1 in 50 possibility for corporations! Avoid confusion and noticeably lower the chances of an Internal Revenue Service audit at the same time.

Beginning the Business Credit Reporting Process

Begin at the D&B website and obtain a free DUNS number. A DUNS number is how D&B gets a corporation into their system, to produce a PAYDEX score. If there is no DUNS number, then there is no record and no PAYDEX score.

Once in D&B’s system, search Equifax and Experian’s web sites for the business. You can do this at https://www.creditsuite.com/reports/. If there is a record with them, check it for accuracy and completeness. If there are no records with them, go to the next step in the process. In this manner, Experian and Equifax will have activity to report on.

Trade Lines

First you ought to build trade lines that report. This is also known as vendor accounts. Then you’ll have an established credit profile, and you’ll get a business credit score.

And with an established business credit profile and score you can begin obtaining revolving store and cash credit.

These sorts of accounts tend to be for the things bought all the time, like coffee, shipping boxes, outdoor work wear, ink and toner, and office furniture.

But to start with, what is trade credit? These trade lines are creditors who will give you preliminary credit when you have none now. Terms are in most cases Net 30, rather than revolving.

Therefore, if you get approval for $1,000 in vendor credit and use all of it, you must pay that money back in a set term, such as within 30 days on a Net 30 account.

Details

Net 30 accounts must be paid in full within 30 days. 60 accounts have to be paid completely within 60 days. In comparison with revolving accounts, you have a set time when you have to pay back what you borrowed or the credit you used.

To launch your business credit profile properly, you ought to get approval for vendor accounts that report to the business credit reporting bureaus. As soon as that’s done, you can then make use of the credit.

Then repay what you used, and the account is on report to Dun & Bradstreet, Experian, or Equifax.

Not every vendor can help in the same way true starter credit can. These are vendors that will grant an approval with marginal effort. You also need them to be reporting to one or more of the big three CRAs: Dun & Bradstreet, Equifax, and Experian.

Still, you may need to apply more than once to these vendors, and you may need to buy some items you do not need to have, to verify you are reliable and will pay in a timely manner. Consider donating unwanted things to charity.

Accounts That Do Not Report

Non-Reporting Trade Accounts can also be helpful. While you do want trade accounts to report to a minimum of one of the CRAs, a trade account which does not report can nevertheless be of some worth. You can always ask non-reporting accounts for trade references. Plus credit accounts of any sort will help you to better even out business expenditures, consequently making budgeting simpler. These are providers like PayPal Credit, T-Mobile, and Best Buy.

Revolving Store Credit

Once there are 5 to 8 or more vendor trade accounts reporting to at least one of the CRAs, move onto revolving store credit. These are service providers like Office Depot and Staples. These companies are likelier to have products you need.

Use the company’s EIN on these credit applications.

One good example is Lowe’s. They report to D&B, Equifax and Business Experian. They need to see a DUNS and a PAYDEX score of 78 or higher.

Fleet Credit

Are there 8 to 10 accounts reporting? Then progress to fleet credit. These are businesses such as BP and Conoco. Use this credit to buy, repair, and maintain vehicles. Make sure to apply using the business’s EIN.

One such example is Shell. They report to D&B and Business Experian. They want to see a PAYDEX Score of 78 or more and a 411 corporate telephone listing. Shell may claim they want a particular amount of time in business or profits. But if you already have enough vendor accounts, that won’t be necessary and you can still get approval.

Cash Credit

Have you been responsibly handling the credit you’ve up to this point? Then move onto cash credit. These are service providers like Visa and MasterCard. Keep your SSN off these applications; use your EIN instead.

One such example is the Fuelman MasterCard. They report to D&B and Equifax Business. They want to see a PAYDEX Score of 78 or better; 10 trade lines reporting on your D&B report; and a $10,000 high credit limit reporting on D&B report (other account reporting). In addition they want you to have an established corporation.

These are companies like Walmart and Dell, and also Home Depot, BP, and Racetrac. These are usually MasterCard credit cards. If you have 14 trade accounts reporting, then these are in reach.

Monitor Your Business Credit

Know what is happening with your credit. Make certain it is being reported and address any errors as soon as possible. Get in the habit of checking credit reports and digging into the particulars, and not just the scores.

We can help you monitor business credit at Experian and D&B for only $24/month. See: https://www.creditsuite.com/business-credit-monitoring.

Update the details if there are mistakes or the details is incomplete.

Contesting Problems

So, what’s all this monitoring for? It’s to dispute any mistakes in your records. Mistakes in your credit report(s) can be fixed. But the CRAs often want you to dispute in a particular way.

Disputing credit report mistakes commonly means you mail a paper letter with duplicates of any evidence of payment with it. These are documents like receipts and cancelled checks. Never send the original copies. Always send copies and keep the original copies.

Disputing credit report errors also means you specifically spell out any charges you dispute. Make your dispute letter as understandable as possible. Be specific about the concerns with your report. Use certified mail so that you will have proof that you sent in your dispute.

A Word about Building Business Credit

Always use credit sensibly! Don’t borrow more than what you can pay back. Keep an eye on balances and deadlines for payments. Paying on time and in full will do more to elevate business credit scores than pretty much anything else.

Establishing small business credit pays. Excellent business credit scores help a corporation get loans. Your loan provider knows the corporation can pay its debts. They know the business is for real. The company’s EIN links to high scores, and lenders won’t feel the need to require a personal guarantee.

Business credit is an asset which can help your business for many years to come. Separating business and personal credit is just the start.

Maintain Your Individual Credit for Your Own Personal Expenses

Even when you pay all your business’s invoices promptly, every single time, you aren’t doing yourself any favors using your personal charge cards to repay business debt. And the same is true for other accounts such as a checking or savings account.

How come? Because both forms of credit scores are affected by what’s referred to as the Credit Utilization Rate. This is just an easycomputation of the credit you’re using, divided by your total available credit. You want to keep this ratio at approximately 30% or less.

Hence, if you are using your consumer cards to cover your business expenses, you are raising your credit utilization rate. If you bring it above the 30% benchmark, then your consumer credit score will be adversely affected. So this is true even when you are diligent about settling your company financial obligations.

Takeaways for Separating Business and Personal Credit

Build business credit as early as you can and realize the perks long after. Today we want to know what you think about separating business and personal credit.

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