According to the Federal Reserve Bank of New York, over 50 percent of small business owners who apply for loans are rejected. One of the main reasons? Poor credit.
Due to a range of personal financial factors, such as college debt, divorce or bankruptcy, many entrepreneurs do not have good personal credit. The good news is that, in order to build good business credit, you do not have to wait until your personal financial situation is in solid form.
While large banks look at your personal credit score, alternative lenders like factoring companies do not. That’s why it’s easy to start building business credit, even if you have poor personal credit. Here are four tips to help you get started:
- Differentiate your personal credit from your business credit
If your personal credit score is damaged, consider getting a separate tax ID number for your business. You don’t necessarily have to incorporate your business; you can still get a tax ID number from the IRS if your business is a sole proprietorship, an LLC or a partnership. Talk to your CPA for information on the different options for your business and select the one that is right for you.
In addition to getting a tax ID number, it’s a good idea to set up your business to be distinct from your personal profile. This step involves acquiring a separate business address (not a post office box), a business bank account, an official corporate name registered with local authorities and a separate telephone number.
Your business credit score is linked to the tax ID for your business, not your Social Security number. This important difference can help you build positive business credit history and gain major momentum in your business.
Besides the additional capital you can borrow, there are other reasons why you should keep your personal credit profile separate from your business credit profile.
- With a business lender, such as a bank, you’re contractually obligated to pay the loan back, whether through collateral or company profits. If you don’t separate the two and your business collapses, your personal savings and personal assets could be at risk.
- Having separate business credit safeguards your personal credit score. Business owners who rely solely on personal credit cards to fund their operations often end up maxing-out their credit lines, risking damage to their personal credit.
- Build your business’s credit score
Once you have a tax ID number and a legal identity for your business, you can start building your business’s credit history and qualifying for trade and credit lines from suppliers and funding sources.
Start by opening a business credit card and always paying on time. When applying for a business card, just be sure to verify that the card provider reports to business credit bureaus and not to personal ones. The business credit bureaus will add your payment history to the credit file associated with your company name. Unlike personal cards, you may be able to deduct interest from business credit cards.
For your vendors and suppliers, you should open credit lines and make payments on time, so you can start reporting your positive payment activity to commercial bureaus. This is known as trade credit. It typically allows you net 15, 30, or 60 days to pay for your supplies and services. These suppliers will automatically report your activity to bureaus and establish a credit report for your business.
As you establish a consistent history of on-time or early payments with these suppliers, your business credit scores will increase. If you are able to stay on track with your payments, you can establish a strong credit rating for your business.
- Monitor your business credit regularly
Credit is something you’ve got to stay on top of, but the reward is huge: growing your business bigger than you ever thought possible. After establishing strong business credit, you’ll want to maintain your record by checking it regularly. Because credit scores could change in just a short time span (several months), lenders and creditors reassess your company’s creditworthiness on an ongoing basis. If your credit decreases, credit terms can be adjusted, stopped altogether and you could be forced to pay cash on delivery for your supplies.
- Choose Invoice Factoring
Invoice factoring offers an innovative way to turn your invoices into immediate cash. When you factor your invoices, you receive an advance on the customer invoice, so you don’t have to wait weeks and months for payment or risk incurring debt. Factoring is not a loan and therefore does not require credit checks. With the cash flow that factoring brings, you can continue to pay your suppliers on time, which reflects positively on your credit report.
As a small business owner, you may feel like you’re at a disadvantage. But, building a strong business credit profile separate from your personal credit is an easy way to give you the edge. By following a few simple steps, you’ll establish a strong business credit score, enabling you to access better loans at better rates and up to 100 times more credit than you could as a consumer. As a business owner, you may need it.
Are you searching for the right funding partner for your business? Whether you have bad personal credit or business credit, talk to Interstate Capital today and you could have the money you need to finance your goals by tomorrow. Contact us for a factoring rate quote today.