Financial management is one of the most essential and crucial functions of nearly every organization. A small and startup business needs to expertly manage the financial tasks to ensure a regular revenue stream and the prospect of utilizing future growth opportunities.
When we talk about business and finance, one pivotal term is ‘credit’ which shows purchasing or financing ability. The credit helps you for both personal and business purposes. Credit is the primary factor when you have to get a loan for a house or car. The credit used for business purposes and issued in the company’s name is known as a ‘business credit.’
Like a consumer credit profile, the score is linked to an individual according to his/her social security number; similarly, a business company has its own credit profile and score that is based on an EIN (Employer Identification Number).
If you run a startup business, then ‘Business Credit’ is linked to the company and not your personal credit profile. The business company will be responsible for paying the bills and not you. Another vital thing to consider is applying for business credit without thinking about a good or bad credit score. The profile of the business company matters and not that of its owners.
Why Business Credit Important
As a young and aspiring entrepreneur with a desire to run a startup company, you will surely come across the term ‘business credit.’ It is the ability of a company to buy something today and pay for it later.
A personal credit score shows banks and private lenders your financial situation and ability to pay the loan amount on time or not. Conversely, business credit shows the true worth of your company to the lenders, suppliers, shareholders, and vendors.
If you want to expand your business and want to get a small business financing loan, the lenders will review the credit score to determine your business’s ability to pay back the loan. If a business company builds a good credit score, it increases the chance to secure a loan and borrow money when required.
A good business credit means that repayments will be made on time, and there will be less chance of late payments. The four reasons why good business credit is essential are
- You can get business loans quickly and easily without any trouble. Your business can get approval for small business loans, business financing products, and business lines of credit.
- Better and flexible credit and repayment structure from the lenders and suppliers. There is advantage of getting low-interest rates on loans and better credit terms from banks and lenders.
- Reducing the time, you may need to prepay for certain products or services.
- Your personal credit score is not affected.
Build my Business Credit
The best thing about business credit is that it is not always necessary to establish a business credit history. However, having a personal credit score of 690 or above makes it easier to qualify for a business loan.
A bank or lender usually examines the business plan and financial projections of a startup business to determine eligibility before providing any credit. Setting up business credit is not difficult, but the sooner you start, the easier it will be to fulfill the different criteria from lenders, suppliers, and vendors.
Every business company has a credit profile and score, just like individuals do. All the credit information and record of debt payments are managed by Business Credit Bureaus such as Experian, Dun & Bradstreet, and Equifax.
Your business credit report is essential to document because it will be analyzed by lenders, suppliers, investors, and insurance providers when you apply for loans, credit, or insurance. The simple way to quickly obtain business credit is by maintaining a good credit score, but you need to open and manage a commercial credit account.
However, before opening an account, you need to follow certain steps, which are
- Register Your Business
The first and foremost step is to register your startup or new business and incorporate it. The key thing is to keep the business separate from your personal account. After naming your business, you have to establish its legal entity, which can be Sole Proprietorship, Partnership, or LLC (Limited Liability Company).
Adding the term ‘LLC’ to the company name shows that you are separating the business assets and credit profile from your personal ones.
- Request to obtain an EIN
The EIN (Employer Identification Number) acts as a Social Security Number for your business company. It is necessary to identify when you have to file taxes to the IRS (Internal Revenue Service).
- Opening a Business Bank Account
Having a separate business bank account makes a business company look more professional and credible in front of lenders, investors, and shareholders. Opening a business bank account is essential to expertly manage all the revenue, transactions, and expenses.
It becomes easier to analyze the company’s cash flow and maintain a clear record. Keeping a business bank account separate from a personal one helps avoid any complicated issues and challenges regarding taxes.
- Installing a Business Phone Number
Another critical step when establishing a business is getting a dedicated phone number for your company. Installing a phone number in the company name is necessary if the company will use a landline, VoIP-based phone, or cell phone.
It is also important to list the phone number in the local business directory. Having an official phone number makes it easy for clients, customers, lenders, and vendors to contact your company.
- Opening a Business Credit File
To obtain business financing or credit, the first step is to establish a business credit profile with all three credit reporting agencies that are Equifax, Experian, and TransUnion.
- Obtaining a Business Credit Card
An important step is getting a business credit card for a new business in the company name, which is not linked to you or any other business owner. You can select a credit card issuer that is reputable and recognized by credit reporting agencies.
- Starting a Line of Credit with Suppliers or Vendors
If your business company works with multiple suppliers or vendors, then it is valuable to establish credit for the company when purchasing is done. Your business company can ask the vendors or suppliers to report the payment history to the credit reporting agencies.
- Paying Bills on time
The last and most crucial thing to do is make timely bill payments. Just like your personal credit, any late payment will lower the credit rating, have a negative impact on the business credit profile, and make doubts for the lenders and vendors. Payment of debt on time will show your company’s credibility and improve reliability.
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Get a Credit Card for New Business
To get credit cards for my business, you need to submit both business and personal information, which includes
- Business Name
The first step is to register the name of the company legally. The consultants, contractors, or freelancers can put their names instead if they have not finalized any business name. The EIN is also quite important when you have to apply for opening a business bank account and financing such as business loans, line of credit, and business credit cards.
- Tax ID Number
A small business owner may provide a tax ID while most entrepreneurs may not have it but can provide the Social Security Number.
- Company’s Legal Entity
The three common legal structures that most business companies fall into are Corporation, Partnership, and LLC (Limited Liability Company). But most small businesses become Sole Proprietorship which means owned by a single owner.
- Office Address and Phone Number
If the company operates from a commercial office space, you have to provide the official address and telephone number. If you work remotely, then you have to give your home address and personal phone number.
- The date and day the company started its operation
- Type of Industry the Business comes in
The business sector consists of more than a dozen industries. You have to specify a particular industry such as construction, electronics, food, entertainment, healthcare, energy, or transport.
- Total Revenue of the Company
The amount of total money a company can generate is called ‘revenue.’ Profit, on the other hand, is calculated by subtracting expenses from the revenue. If you are launching a new business without any financial history, you can put $0 in the credit card application.
- Information of Shareholders who hold 25% or more of the Business
If a particular shareholder owns more than 25% of the share in the business, then the credit card issuer will want to know his/her name, address, Social Security Number, and date of birth.
- Personal Information
If you apply for a business credit card, you will be asked to guarantee any debt payment on the card. It means that if your business fails, then you will be responsible for repaying the debt on the business credit card. In most cases, the credit card issuer can take personal assets to recover the loan amount.
The personal guarantee helps you to get a business credit card for your new startup business, even if it does not have a lot of revenue, to begin with. The credit card issuer runs a check on the details you provide, which includes
- Name and position in the company
- Yearly income
- Social Security Number
- Percentage of ownership in the company
- Home Address
- Email and Phone Number
- Date of Birth
The best credit card for your small or startup business is one that fulfills your business requirement and expenses. Some of the factors that can help select a business credit card are Annual Fees, Travel-Friendly Feature, Credit Reporting, Rewards, and Bookkeeping Tools.
The Importance of Business Credit Repair
The one common goal that nearly every business company, big or small, strives for is maximizing revenue and minimizing the losses. Unfortunately, since last year, the Covid-19 pandemic has disrupted business operations all over the world. There was a major economic downturn across every business sector, but now businesses are starting to recover.
Most startups and small businesses want to build and maintain good business credit. However, widespread changes and challenges can result in a bad business credit score and make it difficult to get any future investment. The one solution is employing the services of the best credit repair agency that can alter, fix, and correct the information that may be negatively affecting the business credit score.
Build Small Business Credit
A small business is defined as a sole proprietorship, corporation, or partnership with few employees and low revenues than a regular or big-sized business corporation. Initially, a small business tends to have limited capital and resources but can get government support when it comes to financing and tax relief.
A common goal for new and existing small business owners is to access business credit to establish the business more firmly, fulfill the business plans, and take advantage of growth opportunities. It is important to open a bank account and credit cards in the legal business name and separate it from the personal bank account and personal credit profile.
Managing expenses and payment of taxes becomes easier with a separate business bank account. A small business owner has to regularly monitor and track credit reports to ensure no issues or errors in credit history. To clear any issue or dispute, one can easily file a complaint with the credit reporting agency. Texas best credit repair can help you analyze the credit report and figure out which loan program is more suited for your business needs.
A small business already has a limited number of resources to work with, so it must efficiently manage the financial aspects to ensure a good business credit profile. For a small business owner, a good business credit score can
- Make it easy to acquire the much-needed financing
- Improve the value and credibility of the company
- Protect the personal credit
The Significance of Credit Score in Maintaining Business Credit
Business credit is the company’s financial track record that lenders, investors, and suppliers analyze to determine if the company can do business and repay the credit or not. The three companies that calculate business credit scores are Experian, Dun & Bradstreet, and Equifax, but each is different. However, the ranking is done from 0 to 100. Having a score close to 80 or higher is considered a good score.
A higher credit score shows that debt payments are made on time, and the company is a credible one. A lower credit score means late payment and increases the risk of doing business. Some of the factors that affect the business credit score are late or timely payments, bankruptcies, business size, outstanding balance, and years in service.
Apart from the popular credit report agency, a small business must also be aware of FICO (Fair, Isaac, and Company) Small Business Scoring Service (SBSS), which rates a business company’s ability to make timely payments. The SBSS scores are vital to obtaining commercial SBA loans that value up to $350,000, have better loan terms, and help open a line of credit.
The SBSS scores range from 0 to 300, and small business needs to have a minimum score of 140 to pass the SBA pre-screen process. The FICO SBSS credit score is used by more than 7500 lenders across the country.
The first two to three years are hardest for small businesses, and only a few successfully sustain and continue doing business. The Small Business Administration (SBA) states that inadequate or delayed financing is one of the key factors of business failure.
A small business credit score is not private and can be viewed by potential lenders, suppliers, vendors, and shareholders, so it is important to maintain a good credit score from the start. A good credit score also helps acquire small business loans, better loan terms, lower interest rates, and leverage on payments from vendors.
If you have incorporated your small business, rented office space, or applied for a loan, you are likely to have a business credit profile. You can contact credit reporting agencies to view your business credit history and profile. Checking the report is not free, but it is better to view the report twice a year to look for any issues or discrepancies.
The advantage of reviewing your business credit report is to prevent any errors or inaccurate financial data and prevent identity theft. To build small business credit, one must make payments early or on time and analyze the credit report for accuracy.
You also need to consider credit usage as for most lenders, 30% of credit utilization is considered good and improves chances of future financing. You have to monitor the credit limit and ensure that 30% or less is used, so it is easier to qualify for a small business loan.
The SBA states that it can take 12 to 18 months to improve the business score. Business loans can be taken even with bad credit scores, but it becomes difficult to fulfill the stringent criteria and rules. The lenders will analyze other factors such as the revenue of the business and its years in business. If a small business is functioning for nearly a year, then it is easy to qualify for the loan. If you can make monthly payments on time, it will significantly improve the business credit score.
Complete 360 is one stop solution that can help young entrepreneurs align their goals and establish their business. We have a team of professionals who have worked across multiple fields and know about the industry standards and business dynamics. In this fast competitive market, startup and small business rely on support when it comes to establishing business credit, planning and implementing marketing strategies. Complete 360 is here to assist you and help you to achieve your goals.
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