Published By Janet Gershen-Siegel at October 29, 2017
Whether you have a new small company, or you are now connected because you invested in one or have suddenly become an owner or a manager here is why you need to separate your commercial and consumer credit.
Even if you pay all your business’s invoices on time, each and every time, you aren’t doing yourself any favors by using your personal charge cards (or other accounts such as a checking or savings account) to settle business liability. Why? Because both forms of credit scores are affected by what’s known as the Credit Utilization Rate. This is just a simple computation of the credit you’re utilizing, divided by your total available credit. You want to keep this ratio at about 30% or less.
Thus, if you are using your own personal cards to take care of your business expenses, you are building up your credit utilization rate. If you bring it over the 30% benchmark, then your consumer credit score will be negatively affected even when you are diligent about satisfying your company debts.
Even if you are a sole proprietor (let’s say you sell something handmade by no one but you), it will still help, big time, for you to construct a financial fence between your individual credit and your company credit. Why? Because maintaining a barrier means that your consumer credit will not be affected by your company credit. You don’t stand to lose a car, for instance, in the event that your small business goes into receivership.
For the major credit reporting bureaus (Experian, Equifax, and Dun and Bradstreet; you know, all the places you know of where to review a business credit score), credit history is one of the elements they use when determining your company credit score. The longer (and better) your credit history, the better your small business’s credit score is likely to be. When you take into account what credit score is needed for a business loan, then you need to have every single bit of your credit score you can get. If you start early, it can only help you.
You may not like to imagine it, but there are going to be times when the work dries up. 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 need to make payroll or equipment payments, or just deal with the rent, you are going to really need business credit in order to get by. And by setting up your business credit before you really need it, you are far more likely to obtain superior terms– or maybe credit at all.
What does this mean? If you have been smart and set up your firm with an EIN (employer identification number), then eventually in the process you needed to proclaim to the Internal Revenue Service that your small business is, certainly, a genuine business and not just a leisure pursuit or the like. As a result, the IRS is already treating you and your small business individually when it concerns tax liability. Hence, if you’re still floating interest-free loans to your business with your consumer credit cards, then now is the time to stop doing that.
What is trade credit? It’s where you work straight with a local supplier in order to develop 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 maybe pens and paper. A plumber needs lengths of pipe. A carpenter needs nails. And just about everyone needs coffee. This is where to start business credit!
When you develop a trade credit relationship, you also open the door for other sorts of relationships. By supporting a local business, you help your community. Furthermore, you never know who will introduce you to your next customer.
In some cases, a business opportunity is simply too good to pass up, and you must take action immediately. This might be anything from getting real property at auction to buying out the equipment owned by a company going through reorganization, to bidding on resources when they reach their best price for the year.
However, you may not have that kind of revenue handy. Setting up business credit means that bank loans will be granted faster and with better terms. You will have the opportunity to make the most of these opportunities, and seize them when they are still meaningful. Without business credit, even if you get a loan, it will certainly take longer– and someone else might get those economical raw materials or outbid you on that prime real estate.
Set up business credit as soon as you can and realize the benefits long afterwards.