Though everyone is aware of personal credit, few really understand how business credit works. Sadly, this has led many an entrepreneur down the road of disappointment and business failure. Hard-working business owners are left with little to no access to business funding when they need it most.
By taking a few simple steps, you can build a strong credit file for your small business; one that is separate from your personal credit history. In doing so, you will be able to access 10 to 100 times more credit than a consumer. Considering that the average business owner requires at least 10 times as much credit as a consumer, building business credit is key to sustaining a growing company.
Consider the following three ways you can keep your business and personal credit separate:
- Separate Legal Entity
The first step is to establish your business as a separate legal entity, such as a sole proprietor, LLC or S-Corp. To determine which legal entity is best for your business, you should sit down with your tax advisor or financial planner. Sites like LegalZoom and Rocket Lawyer can help you complete much of the work by filling out their questionnaire (you pay a small fee). The site you choose will then fill out the necessary documents and file them with your state.
- Business Checking Account
A very simple step, setting up a business bank account can take as little as 30 minutes at your local bank. In doing so, you can keep your business financials much more organized. The account should only be used for business-related expenses. When it comes time to paying yourself, the money should be moved into your personal checking account. Business lenders will request to see your bank statements to see how your business is performing.
- Business Credit History
You can build your business’ credit history by opening a business credit card. Just be sure that you always pay it on time. The business credit bureau will then add your positive payment history to your company’s credit file. Keep in mind that you need to make sure the card provider reports to business credit bureaus, not to personal ones. As you create a consistent history of on-time or early payments, your business credit scores will continue to improve. As a result, your access to even more credit options (and better payment terms) will also increase.
There are several other reasons for separating your credit profiles:
- If your business fails, you risk losing personal savings
- It makes it easier to identify business expense deductions for tax purposes
- If your business is sued, your personal assets will be at risk
- Separating your business credit protects your personal credit
If you’re currently struggling with bad credit and need cash fast, consider what an alternative lender like First American Merchant can offer. As a high-risk specialist, FAM offers merchant loans regardless of bad credit. In fact, their business funding options provide quick working capital (in as little as 24 hours) and can simultaneously help you build your credit score.