Separating business credit from personal credit is imperative to the survival of a business and for the sake of personal finances. If a business fails and personal credit is tied to it, then the business owner’s personal finances suffer. By separating business and personal credit, one does not bring down the other if one or the other fails.
However, if you are a sole proprietor, your business credit and personal credit a closely linked in the eyes of lenders and banks. That is why it is a must that steps be taken to protect your personal and business finances through separation. For instance, late mortgage payments could affect your ability to acquire new credit for your business, but separation would prevent this domino effect from happening.
Small Business Funding
One of the reasons why personal and business credit is tied together in many cases is because the business owner must finance their startup and they turn to their personal credit to do that. In turn, small business loans are typically acquired under personal credit as is the business credit card and, sometimes, individuals use their personal credit cards to start their business. The reason is because the business has no credit, so the bank has nothing else to go on. By taking steps in the beginning to separate business and personal credit, personal finances never have to be a factor.
The way to completely separate the two, however, is through the business’s structure. A sole proprietorship means that the financial burden of the business falls completely on the owner. There is no line drawn between personal and business finances. Structuring as a Limited Liability Company (LLC), which limits personal liability, or incorporating the business to eliminate all personal liability, will give it a legal structure that will keep personal finances out of the picture.
Nonetheless, wee suggest that you consult a competent attorney to recommend the best legal structure that best suits you and your goals to position. Incorporating means specific requirements must be met within your state and potentially be more expensive than setting up an LLC. There are also specific requirements and instructions that must be followed when applying to be an LLC and all of those requirements will depend upon the law in the state in which the business is to be established.
Establishing Business Credit
After establishing business structure, there are some steps to be taken that include establishing accounts with vendors that will grant credit without the use of personal credit information. UPS, FedEx, and other such companies will do this. On-time payments are then reported to the credit bureaus Dun & Bradstreet, Business Credit USA, TransUnion, Corporate Experian, and Small Business Equifax. You will also need to register with these credit agencies.
When registering with Dun & Bradstreet, you are given a 9 digit D-U-N-S number that identifies your business, as well as instructions from them on how to establish your business’s credit rating. This D&B credit profile will benefit you when you need to acquire a business loan, business credit card, lease equipment, when cash is tight, when you want to make sure your lenders are giving you fair deals, when you want to forego Cash On Delivery and pay on 30 days, and there are some entities, such as the US Government, that require you to have a D-U-N-S number in some cases.
Your business must also be in compliance with all business requirements, such as having a business license, registering for a certificate of good standing with the Secretary of State, operating off of an Employer Identification Number and not your social security number, listing a landline phone in the telephone directory under the business name, having a website, and having a business email address. Doing all of this makes acquiring small business funding much easier so that you can establish credit for the business without using personal credit.
Also when establishing business credit, you should not have just one business credit card. Instead, work to acquire three, such as a regular business card, a card from a warehouse club like SAM’S Club, and Club Discover Card. No card should be linked to your personal credit so that on-time payments can be reported to the business credit bureaus and not on your personal credit reports.
You can then gather your business plan, financial statements, and all relevant documents to take to a bank to acquire financing when you need it. A solid business plan and all supporting documents have to make a solid loan package for the bank to even bat an eye at it. The goal is to move to the top of the list for review by the bank’s credit committee. That way you can acquire the small business funding you need and further establish your business credit.
Manage Your Debt
Once everything is in place, you then need to manage your debt. This means paying each business credit card bill on time, making loan payments, and doing what is needed to increase cash flow. It is the initial establishment of business credit that can be so difficult and not so much paying the business credit card bill or the business loan. Just make sure that none of your debt ever over leverages the company because that could result in missed or late payments that could hurt business credit. Unfortunately, when some hurt their business’s credit, they turn to their personal credit to save it. But it is when a business owner is responsible and patient from the beginning that the two can remain separated.1
If you’re reading the last part of this article, we know that you’re serious about setting your business apart we invite you to register for our next webinar. You can go here to register: Business Credit Webinar