Business Credit for the Small Business Owner

About 75% of American small businesses operate as sole proprietorships. They have all the business licenses they need, but are not legally structured as a Partnership or a Corporation (S-Corp, C-Corp, LLC).

And as a sole proprietor, your personal credit and business credit are one in the same. You may have a separate checking account for your business (which is a VERY good idea). But if you have a credit card in your business’s name, your PERSONAL credit was used in the application. And any credit bureau reporting about that card goes onto your personal credit report. Only legal business entities (Partnerships and Corporations) can get true “business credit” – which operates on a completely different system than personal credit.

Business Credit Tips for the Sole Proprietor:

Tip #1: Open a separate checking account for your business.

This account will be a personal account (since you are not a legal business entity), but treat it like a business account. Do not make personal purchases directly out of your business account. Don’t make online transfers from your “business” account to your personal account. And it’s best to write yourself a check to pay yourself. There should always be a paper trail separating your business from your household finances. Plus, it will be much easier to track income and deductions for your business come tax time.

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Tip #2: Designate one personal credit card to use for business expenses.

If you cannot open a new account because your personal credit is troubled, you can use a card you already have – just make sure it has a zero balance when you start using it for business. Then, use this card only for business purchases. Again, keeping personal and business expenses separate creates a trackable paper trail and makes tax time less of a headache.

If you want to improve your credit quickly to apply for a new credit card for your business, schedule a free consultation with an NCES credit consultant today.

Tip #3: Always remember that as a sole proprietor, your business credit habits are reported to your personal credit profile.

Running a small business can be expensive – especially when you are first starting out and expenses are higher than income. Consider all your business purchases carefully and be prepared when those credit card boils come in.

If you charge more than your business can pay back in full, take care not to max out the credit card you designate for business. FICO doesn’t care that you are building an awesome business! All they see is high balances and cards that are nearly maxed out. Yes, you will have to make sacrifices while building your business, but do you really want to risk your chances of buying a home or qualifying for parent loans to help send your kids to college?

If you haven’t already done so, create your personal emergency fund to cover any personal expenses if your business hits a slow period. You’ll be able to cover your personal expenses without dipping into your business’s operating funds… and you’ll be less stressed about money so you can focus on building your business.

As your business grows…

All big businesses started small (even Microsoft, Apple, and McDonald’s)!  And when YOUR business grows to the next level, you will probably transition from a sole proprietorship to a Partnership or Corporation.

Why? Legal business entities offer a “shield” of protection separating YOU from YOUR BUSINESS in the eyes of the court (for liability) and the banks (for credit, debt, and bankruptcy). That way, if your business gets sued or is in financial trouble, you can protect your personal assets – like your retirement account and your home.

Once you have your legal structure in place, you can open a true business checking account and start building business credit. Be sure that the bank you choose reports accounts to Dun & Bradstreet (the leading business credit reporting company).

Business credit works on a different system than your personal credit and does not co-mingle with your personal credit. Applying for business credit can be challenging at first, but it is worth the effort as you build your business into a legally and financially separate entity. Start with the vendors you already use for supplies and goods. Ask if they will extend your business a line of credit (without checking your personal credit!) and then report it to one of the business credit reporting companies: Dun & Bradstreet, Equifax Business, or Experian Business.

Once you have a business line of credit established, use it wisely! Check your business credit report regularly to make sure your account activity is being reported to the business credit bureaus. After several months of positive activity, you can try applying for another line of business credit. Keep paying responsibly and building a good business credit history. That way, when the time comes to “scale up”, you can apply for a business loan or construction loan to confidently launch into your future.

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Other articles that may interest you:
Starting Your Dream Business When Your Credit Is A Nightmare
Business Credit 101
How Social Media Affects Your Credit Score

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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