Business Credit Basics Primer

Business credit basics

We Mean Business (album) (Photo credit: Wikipedia)

Business Credit Basics Firewall with Personal Credit

Business owners typically operate as a d/b/a (doing business as) status in the beginning.  It may be “Joe’s Dry Goods” on the sign outside but the legal status is “Joe Smith d/b/a Joe’s Dry Goods.”  It’s the same with “Jane’s Bakery”, “Phil’s Pizza” or “Gina’s Beauty Parlor.”

This is fine in the beginning stage of a business.  Because the owner is taxed as an individual there is no losing sleep over complicated taxes.   There is personal liability if a claim is made against the business.  For these and other reasons a business that plans to grow will want to assume a legal status such as an LLC or a corporation.  The business needs to be a separate legal entity with its own separate credit.  Separate legal status is easy to do.  Separate business credit is a whole different story.

Separate business credit can and should be established early in the life of the business.  Later in the life of the business separate business credit will be an enormous asset to be sold with the business.  All businesses that are sold include “good will” that has accrued as an asset to boost the sale price.  What better good will asset could a business have that could match multiple generous lines of credit and an established business credit rating of Excellent?

Credibility Tests for Applicant of Business Credit Basics

Here are 7 basic tests by which a new business credit applicant can expect to be measured after entity setup:

  • Physical or at least a Virtual Address.  Your home address will be smoked out by creditors if you try that as a short cut.
  • Business phone number listed in 411.  Ring Central will do
  • Business Fax Number
  • Professional email address and website
  • Proper Licenses
  • EIN Number (Like a social security number for a business).  Apply at IRS.gov
  • Company separate bank account.  A lot of lenders consider the date you open your company bank account as the official beginning of your business existence.  Keep as much money in this account as you are able because a high average daily balance figures into your bank credit rating.
  • Dunns Number to activate your credit profile..  (For establishing Dunn & Bradstreet ratings in the 5 different types of scores they keep).  Go to Dun&Bradstreet website for this.

Actual Separate Business Credit Basics has to Begin Somewhere

Begin with good Banking habits.  You are shooting for a high Bank Rating:

  1. Bank Rating High 5…………..Consistent balance between $70,000-99,999
  2. Bank Rating Medium 5………………………………………………….  40,000-69,999
  3. Bank Rating Low 5…………………………………………………………..10,000-39,000
  4. Bank Rating High 4…………………………………………………………..7,000-9,999
  5. Bank Rating Medium 4…………………………………………………….4,000-6,999
  6. Bank Rating Low 4……………………………………………………………1,000-3,999

Banks want 3 consecutive months of the above balances to maximize their view of the application.  Banks will look for consistent cash flow, a consistent amount of regular deposits in greater amounts than withdrawals.  The older the account(s) the better.  The best customer from the bank’s point of view is one who also uses other products the bank has to offer.

Apply to vendors like Quill Office Supplies and U Line for starters.  They will give you the lowest form of business credit for beginners at “Net 30 days.”  Pay them on time.  Make sure they report your on time payments to Dunn & Bradstreet and whoever else they will report to such as Equifax and Experian’s smart business data.   Don’t be afraid to ask creditors to make sure they report.  Let them know the reporting is important to you. You are establishing a basic business credit score.  This is called your “Paydex” score.  Just like with personal credit,  prompt payment of your business accounts is everything.

After about 6 months of reports are in (you can check at D&B’s website) it’s time to raise your sights.  Try to get a business revolving store credit.  Take whatever limit they will give you at whatever stores you frequent be they chain, internet or Mom & Pop.  Don’t fill in your personal social security number on the application.  Build this form of credit up for a few months.  Dell is quite lenient with business credit for new businesses.

Now with close to a year’s worth of reporting in your portfolio it is time to ask your bank or credit union for a cash credit card in the corporation’s name to cement the deal.  Don’t fret if the credit limits are lower than you had hoped for when you applied.  The credit limits will grow along with responsible use of the credit line over time.

You can take out a lease on a car now using your business credit.  Your business credit opportunities will grow rapidly from here if you stay on your toes.  What a nice feeling of accomplishment.  You have perfected in a business like way this very important component of that business you started as a passion.  Real Estate credit is now within reach.

Which Brings us Full Circle.  What Better Asset to Offer than Great Business Credit when Selling a Business?

 

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After practicing law for 37 years Edward F. St. Onge, Sr. now devotes all his time to helping consumers achieve a high credit score with amazing speed. Learn the counter-intuitive secrets to credit scoring through his down to earth instructions backed by extensive knowledge of the laws and trends. All of the latest tricks and techniques that they don't want you to know now at your disposal. At last a level playing field for the consumer!

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