Separating business and personal credit

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Separating business and personal credit

Published By Janet Gershen-Siegel at October 23, 2017

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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 (Experian, Equifax, and Dun and Bradstreet; you know, all the places you know of where to check a business credit score), 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. 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 just pay the rent, you are going to be in need of business credit so as to get by. And by developing your business credit in advance of you really need it, you are much 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 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, then 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 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, to 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.

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 utilizing your personal charge cards (or other accounts such as a checking or savings account) to repay business debt. How come? Because both forms of credit scores are affected by what’s referred to as the Credit Utilization Rate. This is just an uncomplicated computation 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 utilizing 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 even when you are diligent about settling your company financial obligations.

Build business credit as early as you can and realize the perks long after.

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