Having good credit means to be worthy of your word and therefore, trusted to receives goods before payment. Credit can be the key to success for many people, entities, and businesses. For the mom-and-pop business, the startup company, and the person that hit rock bottom with their savings but looking to make a comeback—credit is your best friend.Some even believe credit is more beneficial than having money. Yes, money is great and definitely a must have but, why spend your money when you could leverage someone else’s money?
Almost all successful businesses use credit. One thing wealthy people agree upon is that you could never have too much money and likewise, you could ever have too much credit. We’ve all heard the saying, “a dollar saved is a dollar earned,”and the same goes for credit—save your money and leverage credit! A lot of people are not aware of this but, the same way you build personal credit you can build business credit.
If you own a business you know it’s best to create an entity not tied to you for legal purposes. You should also do the same with your credit. You want to ensure your personal credit do not become your business credit. Often people apply for business loans or credit cards in their name to fund their business and two years later their business tanks then they’re left with no income and bad credit. Major failure here--trust me, you don’t want to do this. It’s imperative to separate your business finances from your personal finances. In this blog I’m going to explain the different levels of credit and walk you through the steps to building a solid business credit profile.
First Things First |Establish your Business
When establishing your business it’s important to choose a name that sounds worthy of receiving credit. Be sure to pick a well thought out name that says, “I’m serious about my company and worthy of your credit.” Do not name your company Smoke and Go, Loans or Us, or anything along the lines that says, “I’m in the cannabis business or I’m borrowing your money to loan it to another person.” Banks do not want to loan money to risky businesses.
This is as easy as going online and Googling secretary of state for the state of your choice. I recommend incorporating your business in the state you will be doing business in however, many people like to take advantage of other states tax laws. If this is something you choose to do, I highly recommend consulting with a CPA or a legal adviser. Also, to keep your business unlinked to you, it’s advised to purchase a registered agent.
Obtain an EIN
An employer identification number (EIN) is a nine digit number assigned by the IRS. For a business entity, this number is equivalent to what a social security number is for an individual. It is used to identify the tax accounts of employers and sole proprietaries who are required to file business tax returns; and required by creditor when applying for credit without a personal guarantee. To obtain an EIN visit the IRS website and complete a SS-4 form.
Virtually Anywhere| Establish a Location
Remember, we’re aiming to keep our personal life separate from our business therefore, we don’t want to use our home address as the business address. Virtual offices are available in every major city and various small towns throughout the US. Many companies that offer these services have bundle deals that allow you to get an address, mail forwarding services, and conference room usage for a decent monthly price. Do not use UPS or a PO Box for you address—creditors will not accept this as a valid business address.
Get a Business Phone Number
This is a very important step that must not be missed. You want to ensure your business is listed in the 411 directory under your business address. The easiest way to do this is to establish phone services with a provider that reports to the 411 directory. There are many ways to do this: 1) contact your local telephone company and request a Remote Call Forwarding Number, 2) obtain an 800 number and use the company List Yourself to get listed in the 411 directory, 3) subscribe to a small business VOIP service—Vonage is my company of choice.
Dun & Bradstreet | Get a D-U-N-S Number
The data universal numbering system (DUNS) is used to maintain up-to-date and timely information on more than 300 million global businesses. D-U-N-S numbers are used by lenders to reference the reliability and financial stability of a company, and for business credit reporting purposes. This nine digit number is tied to your EIN and reported back to the Dun & Bradstreet credit system. The fastest way to get a D-U-N-S number is to apply for one online at Dun & Bradstreet (D&B). Lastly, you’ll want to get EUpdate access and purchase a basic report to view your D-U-N-S number—this can be done after your business starts showing on the DUNS website.
Understanding the Different Tier Levels of Business Credit | Credit 101
A famous rapper once said, “There’s level to this…” and the best way to explain the process of building business credit is to outline the tier structure in which you must follow when building from the ground up. Yes, you can apply for a business loan or a business line of credit without having a solid business credit profile. However, you will mostly likely to get denied if you have poor personal credit or if you do not wish to tie your personal finances with your business finances. Below are the credit tiers explained and the order you should apply to them starting from the easiest and quickest approvals to the more complex authorizations.
Trade Accounts| Net Term Accounts & Utility Bills
Net term accounts are “buy now pay later” accounts. Companies give you the option to receive their products up front and pay the invoice at a later date. The most popular term accounts are Net10, Net20, and Net30 where the ending number identifies the number of days the vendor allots the buyer before requesting payment. Day one usually starts the day the invoice is cut. Some popular companies that offer net term accounts are: ULine, Quill, FedEx/Kinkos, Office Depot, Amsterdam Printing, Reliable, and Gemplers. However, a quick Google search will help you find more companies that offer net term accounts. Be sure to choose a company that reports positive credit behavior to the credit bureaus—not all companies do this. Lastly, if you have a physical office or need for a business cellular phone, utility bills and cell phone service providers are great candidates for establishing a business credit profile.
Advanced Trade Accounts| Store Credit & Revolving Credit
Store credit is credit only available for use at a particular company and its subsidiaries. The vendor grants the business a revolving line of credit to be used to purchase goods or services within their store. This is a higher level of credit and should only be applied for after your business have four to six net term accounts or positive credit reporting. Ideal stores for this level of credit are: Staples, Fry’s Electronics, Walmart, Lowes, Dell, Home Depot, and various gas companies like Shell, Exxon/Mobile, Chevron, BP, and Sunoco.
Bank Lending | Business Credit Cards & Unsecured Lines of Credit
This is a level that every business owner wish to achieve. At this level your business receives cash accounts to use towards anything associated with the businessoperations (i.e, salaries paid, procurement, sustainment expenses, marketing, etc.). Tier four accounts can be business loans from banks or from private investors. These loans are usually based solely on the worthiness of the company and do not require personal guarantee however, banks will always seek personal guarantees. Newly established companies rarely ever qualify for this level of credit. If applying without personal guarantee it is recommended to apply only once your business have a solid performance history and have been established for at least two to three years. There are various lenders offering business loans; carefully research the loan best for you and your company needs.
You've got Credit--now what? | Monitoring your Business Credit
Business credit is similar to personal credit—it fluctuates and therefore, should be closely monitored. Dun & Bradstreet reports a Paydex score which is a number between zero and 100 used to inform potential creditors on the worthiness of your business and payment history. You want this number to be at 80 or above—pays when invoice is due. D&B does not generate a Paydex score for businesses with less than five trade lines however, Experian and Equifax will report. Companies like NAV and Credit offer business credit monitoring packages that will monitor your score and recommend credit lines based on your business credit performance. For more information on building business credit or monitoring your business’ credit history leave us a comment or subscribe to our blog service.