Business Credit 101
What is Business Credit (BC)?
Business credit is a line of credit extended to the business only, and that credit is built on the EIN of your corporation, with no personal guarantee needed from the owner. Think of your EIN as the SSN of your business, and like your SSN, a credit profile can be built on it. It does not happen automatically; it needs to be done purposefully.
Why should I build Business Credit?
We form a corporation for two reasons. First to get access to the tax advantages it brings. Second and just as important, it gives us access to the corporate shield, which protects our personal assets from the business. Unfortunately, as small business owners, we tear down that shield every time we sign for a CC under our name or take out financing with our SSN attached to it. There is nothing wrong with starting our companies with our own funding and a personal guarantee, it is the quicker route to get up and running, though there comes a time when we need to transition away from that. We owe it to ourselves and our families to have that shield in place. Building BC provides the shield, and along with that comes advantages in utilizing it. The more BC we use the more they want to give, 10, 20, 50x what we as an individual can borrow at a time, and usually with much better interest rates too, and if we do not want to utilize that power, we can keep it in our back pocket when lean times come around. How many SBs could have used a line of credit such as this to bridge the gap when the shutdowns were happening? Instead of dipping into retirement accounts or taking out loans with a personal guarantee.
How do I build Business Credit?
There are things to consider when wanting to start building a BC profile. Do I have a website? Is my work email in my business name and not a gmail, hotmail, outlook account? Is my business registered to a physical address and not a PO Box? These and a mix of about 120 other factors are what lenders look at first when considering if your business is fundable, so these things are what need to be corrected before you start down the road of building your BC profile. After that we need to make sure our EIN is registered with the 3 BC bureaus (D&B, Experian Business, and Equifax Business), because we need to build our profile around all 3 at the same time. It makes it easier in the long run to work on them together, because when we go to get financing for say new equipment, work vehicles, or to purchase property, the lender will check their mix of 120 factors of your business's credibility and then will pull a credit report for the EIN, and we do not know which bureau they will look at. After making sure we are registered for all 3 and that they will be tracking us, we navigate our way through the 4 tiers of BC. You know our personal FICO ranges from 350-850, 900, well with BC it ranges from 0-100 on each of the 4 tiers and we want to be at tier 4 and 80+ on the score. That is the promised land, and when our business can get lines of credit extended to it alone, with no personal guarantee from us. Growing through the 4 tiers can be tricky though, because only about 7% of vendors/creditors out there report to the agencies, it costs money to do so. So, knowing what vendors to use and which bureau they report to (most that do report, only report to one) is vital, as we do not want to be spinning our wheels with vendors who do not report.
If you would like to continue this discussion and learn more, please reach out and I would love to share