Business Credit 101 – Building and Maintaining Your Business’ Good Name

Your business is your baby. The product of your blood, sweat, and tears come to life. To keep your business healthy and growing, you must know how to build and maintain a good business credit profile.

Did you know business credit works very differently from personal credit? Don’t be ashamed if you didn’t. Only about 1 in 10 entrepreneurs do. So here’s what you need to know:

How Business Credit Works

Your personal credit score is based on how much money you owe, how many lenders you owe it to, and how well you pay those debts.

For your business, these things matter, too. Except, they are based only on what your business pays to and borrows from suppliers and vendors. But there’s a lot more that goes into calculating a business credit score, like the number of years you’ve been in business, how many employees you have, your yearly revenues, and the industry you’re in.

Your business’ credit score will be negatively affected if your business has defaulted on any lines of credit, lost a lawsuit over a debt, has liens on any business-owned property, or has filed bankruptcy.

Business credit scores range between 1 and 100, with 75 being considered excellent. There are 3 main companies that maintain business credit profiles: Dun & Bradstreet, Experian Business, and Equifax Business.

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How Information is Reported to Business Credit Reporting Companies

Suppliers and vendors report to the business credit reporting companies on a voluntary basis. You may have been in business for years and have a great payment history with your creditors, yet not have a business credit profile at all! Many business creditors will report your account information for you if you ask.

Keeping Business and Personal Finances Separate is Critical

If there are blurry lines between your business and personal finances, you risk being held personally responsible for business debts. To best protect your personal assets, follow these steps:

  1. File your business as an LLC or Corporation – this creates a legal situation called the “corporate veil” that protects your personal assets from business defaults. But if you do not keep your business and personal accounts separate, you can “pierce” your corporate veil and be held personally liable anyway. Make sure everyone you do business with knows you are an established business entity by putting LLC or Inc. on all your business materials. Paying someone to create and file the paperwork for an LLC or corporation can be quite expensive, but you definitely want some guidance here. You can file the paperwork yourself, just be sure to buy the document templates from a reputable source. You may find free forms on your state’s secretary of state or corporations website. (Just search “secretary of state corporations” for your state)
  2. Request an EIN (Employer Identification Number) for tax purposes. These numbers are used for tax and reporting purposes and provide your business with a unique identity just like your personal social security number does for you.
  3. Register your business with the business credit reporting companies. You can find information on how to do this on each company’s website.
  4. Open a separate checking account for your business. NEVER pay personal expenses with your business account or business expenses with your personal account. You will blur the lines needed to maintain the corporate veil.
  5. Open a business credit card. Bonus: you can deduct the interest fees off your business taxes.
  6. Pay yourself a salary with a check from your business account and deposit it in your personal account. This creates a paper trail to establish separation of funds.
  7. Be sure to keep up with all required formalities for your LLC or corporation. These may include annual meetings, establishing by-laws, and keeping corporate minutes. You can find more info about your responsibilities on your state’s secretary of state website.

How Do I Establish Business Credit When I am Starting Out?

Getting your business credit profile started can be tricky when you are just starting out. But there are some ways you can start. Completing the above steps is the first step since it establishes your business as a separate and legal entity.

If you have any money in savings, use it as collateral for a small business loan from your bank. Be sure to ask that the bank report your payments to the business credit reporting companies.

Transfer all your regular bills for your business (like water, phone, electricity, or internet) into your business’ name.

Get a business credit card. Just make sure it is one that is not tied to your personal credit. If it is, you risk damaging your personal credit or losing personal assets if the business struggles.

Finally, talk to your suppliers and vendors. Ask them to extend you lines of credit for the materials you need to run your business. If they agree, ask them to also report to the business reporting companies on your behalf.

And most important of all, pay everything ON TIME!

Maintaining your Business Credit

Once you have information on your business credit profile, you should take care to keep your record “clean”. Pay everything on time and keep your personal finances out of the mix. Keep your business lines of credit (also called trade lines) active and current by using them regularly. Inactive accounts are often closed and will no longer support your credit profile.

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If you have any questions, please give us a call at 770-952-5168 or contact us online.

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Other articles that may interest you:
Six Places to NEVER Use Your Debit Card
Starting Your Dream Business When Your Credit is a Nightmare
7 Ways to Improve Your Credit

This information is intended for informational and educational purposes only and not as legal advice. If you have concerns about your credit report, harassment, identity theft, illegal collections activity, garnishments, or property liens, you should consult an attorney who specializes in consumer rights and defense.

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