If you are thinking about starting a business, it is important to have spotless credit in order to get the financing you need for your business. However, if you already own a small business and your credit isn't great, you can still repair it and get back in the loan game so your small business can survive.
Make Yourself Creditworthy on a Personal Level
In order to have a good business credit score, you must have a good personal credit score. If your personal credit score is not good, it will affect your business. If this is the case for you, you can rebuild your personal credit score so all is not lost!
The first step toward rebuilding your personal credit is paying off any outstanding debts that are overdue or in collection. If you have a personal credit card or two that you can't pay off immediately, be sure and make regular and on-time payments to them. It is very important to understand the Credit to Debt Ratio that banks and credit rating agencies use to see if you are in over your head with debt.
Credit to Debt Ratio = Debt Used Divided by Available Credit = Debt Load
Your debt load should be under 50% and preferably under 30% in order for you to be considered creditworthy on a business or personal level. Debt load includes mortgages and home equity lines as well as credit cards. Unless your debt load is below the 30-50% limit, you will not qualify for a bank loan.
If you are able to pay off a couple of accounts, do not close them. This can lower your credit score.
Make your payments on time, try to pay off whatever debt you can, try to lower your credit to debt ratio to under 50% and hopefully, under 30%, and don't encourage inquiries about your credit as they are viewed negatively. For example, if you are talking to a business and they ask if they can check your credit, think carefully before you answer "yes." This is an inquiry on your credit report.
Unless you stay on top of your credit reports on a regular basis, they will almost certainly have errors on them. What's more, the credit reports from the three major credit reporting agencies tend to have different information on them. You need to be able to look at all three. The solution is to take advantage of the fact that you can have one free credit report per year, which includes reports from the three major credit reporting agencies. This articlearticle tells you how to get a copy of all three credit report and goes into detail on how to clean up your credit reports. Follow the instructions and you will have a spotless credit report that will lead to a better credit score!
Make Sure you are Establishing a Credit Record in your own Right
If you are married or have a domestic partner with whom you make financial transactions, your credit may be tied to their credit. If you are going to start a business, you need to establish a credit record separate and apart from any personal relationships. Be sure that you have a credit card or a personal loan in only your name.
Your Business Must be Viewed as a Separate Entity from you Personally
There are several steps you must take to be sure your business is viewed as a separate entity in order to establish business credit. First, you must file for an employee identification number (EIN). Next, you must establish a business bank account. It is important that your business and personal bank accounts be separate so your business will not be viewed as a hobby.
You must obtain all the necessary city and state business licenses and permits that are necessary in order for you to operate your business. You also must have a telephone line for the business in the exact business name.
If you set up your business as either a sole proprietorship or a partnership, you are personally liable for the debts of the business. Setting up your business in this way is not enough to separate your business and personal credit. However, if you follow the steps above and file your taxes properly for a sole proprietorship or partnership, you will go a long way toward separating your business and personal credit. If you use a Limited Liability Company as your form of business organization, your personal credit and your business credit are separated. Check with your state regulatory agencies to see what their rules are about LLC's.
You can also use a S-corporation or a C-corporation form of business organization. Both will separate your personal credit from your business credit and give you limited liability.
Business Credit Cards
Try to obtain a couple of business credit cards that are not connected to you personally. Use them wisely and pay the bill in full. Establish relationships with suppliers for your firm and try to establish credit accounts with them. Pay on time and according to terms.
If you take these steps, you are on your way to establishing good business credit. If you are just starting a business firm, you will probably need to use all these steps. If you are already a business owner, you may only need to use some of these steps. As you establish your business credit, keep the 5 Cs of business credit in mind. Good luck in establishing your business credit!