How to get over the initial hurdles of building business credit
16 | The 5 Steps to Business Credit Abundance
Table of Contents
INTRODUCTION
Step 1: Personal Credit Analyzation
· Personal credit and its implications on a broad scale
· How it can help you build business credit quicker
· How to repair it if necessary
· How to limit your personal liability
Step 2: Business Formation
· You don’t need to actually run a business to form a business
· LLC vs. Corporations, etc.
Step 3: Establish a Business Credit Profile
· Dun & Bradstreet DUNS Number
· Tax Identification Number
Step 4: Vendor Credit
· Targeting the right accounts
· List a couple examples
Step 5: Revolving Lines of Credit
· Credit Building Diligence
· Final Thoughts
Bonus:
· Creating a business identity and funneling virtually all of your expenses through your business
16 | The 5 Steps to Business Credit Abundance
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If you’re reading this now, you’re likely one of thousands that want to learn how to build business credit and make use of the many advantages it offers such as:
ü Offer you smart leverage by freeing up more capital
ü Grow and expand your business quicker
ü Use your available business credit to launch your business start-up
ü Use your low to zero interest credit lines to invest in stock and real estate
ü Minimize or eliminate your personal guarantee on credit debt
ü Have rainy day funds for when your business goes through turbulent times
ü Etc.
As you can see from just a few of the examples above, building business credit is about more than simply leveraging your cash for business expenses, it has much greater implications that are all to your benefit.
If you’re new to the idea of business credit, don’t fret. This eBook will provide an excellent foundation to show you the five most important steps on how to not only build business credit, but how to also build it in exponentially. So, get ready to transform from credit zero to credit hero!
The truth about personal credit
& limiting your personal liability on business credit
Okay, let’s cut straight to the chase…
Do you need good personal credit in order to build a substantial sum of business credit? The answer is, No.
Will it greatly benefit you to have good personal credit as you being to build business credit? Most Definitely.
For those of you who do not have the best personal credit scores, don’t stress over that one bit. By following the process outlined in this eBook, you still stand to easily garner $25,000 to $50,000 in business credit - even six figures if you’re serious enough about putting in the right amount of effort as you begin to build credit. With that said, you may be asking “So why is it beneficial to have good personal credit initially?” Well, that answer is pretty simple. Let’s look at these two examples for illustration purposes:
Building Business Credit with Good Personal Credit
Applying for your first revolving credit card with good personal credit will allow you to use your personal credit profile in combination with your business ID # (EIN) and garner much more credit up front – approximately $2,500 to $5,000. Though you will use your personal credit information to qualify, your credit history will primarily report to your business credit profile. The good thing about garnering more credit in the initial phases of building business credit is that you set the tone for larger credit limits with other creditors as long as you properly manage your business credit accounts. In other words, you would rarely have to take a step back when applying for other credit lines, accepting lower credit limits. Instead, you can continue to reach for credit lines that exceed your initial credit limits. This offers you the opportunity to maximum the growth of your business credit at a faster pace. Keep in mind, once you begin to establish a reputation for paying your debts on time, you will no longer require a personal guarantee on credit in most cases. So consider this initial step as a long term benefit.
Building Business Credit with Poor Personal Credit
Using the example above, if you’re at the beginning stages of building business credit, some creditors will require a personal guarantee on revolving credit lines, though not all of them will. But when that is the case, business credit guidelines tend to be looser than personal credit guidelines, so even if your personal credit scores are not up to par, chances are you still may qualify for credit. However, your initial credit limit will be much lower than your counterparts with good credit. For example, you’re more likely to get approved for credit limits in the range of $500 and $1,000. Compared to $2,500 and $5,000, your access to credit is initially substantially less.
But on the brighter side of things, regardless of what you’re approved of, any little bit counts. You’re in this for the long haul so as long as you properly manage the accounts that you do have, you open yourself up for higher credit limits and better access to credit in the near future. Furthermore, though your initial accounts may start off with smaller credit limits, those same accounts will usually increase in a short period of time.
Most creditors offer credit limit increases after your first three successive months of on-time payments. This cycle continues on a three to six month basis so before you know it, that $500 credit limit can quickly turn into $2,500.
A Few Tips on Repairing Your Personal Credit
Before we jump into these tips and suggestions, I want to stress the fact that your personal credit will not make or break your chances of obtaining business credit, but nonetheless, having decent personal credit will surely make the trek easier to manage. Here are a few quick tips on how you can begin to improve your credit now:
Pay-off small debts
Do you have a one or more personal accounts with balances that can be paid off today? If so, take care of them right away. While it’s good to show a long string of on-time payments, for quick fixes, your credit score will get a nice jolt upward when you pay off your debt. So for example, instead of paying the minimum $15/month on your $200 balance, consider paying off the entire balance in these types of situations.
Pay-off debts in collections
The same applies to debts in collections. While collections items will surely lower your credit score, paying off these items and then disputing them on your credit report will quickly provide you with a credit score boost.
Lower your credit utilization percentage
Typically, you want to keep your credit utilization percentage at or below 30%. What this means is that if you have a credit limit of $1,000, you don’t want to use more than $300 of that limit ($1,000 x .30 = $300). Having high credit utilization will negatively impact your credit score. Decreasing this percentage will have a positive impact on your credit score. With that said, make an effort to keep your credit utilization below 30%.
Get a secured credit card
Secured credit cards are great for people who want to build or rebuild their personal credit. A secured credit card is a type of credit card secured by a deposit account owned by the cardholder. The reason why these cards work well for building credit is that you can use them creatively. For example, if you decide to get a secured credit card with a $500 limit, you can do a cash advance and quickly pay off that advance with the money you withdrew. The purpose of doing this is that the more activity your credit card reports on a monthly basis, the better as long as the credit card balances are decreasing. With this example, instead of using your secured credit card for everyday purchases and paying it off monthly one bit at a time, you will use this card strictly for building credit only – not for making purchases.
So, if you utilize this strategy, withdrawing $150 - $200 a month and paying off that balance in full, on time, you will quickly see a credit score boost.
Dispute negative marks on your credit report
After you’ve initiated the credit tips mentioned above, pull your official credit report from all three bureaus at …and review it thoroughly, noting any discrepancy that you notice. Once you identify the items on your credit report that are now inaccurate or that you believe you can fight, make note of them and submit a dispute to all of them for each credit bureau. Doing so help you clean up your credit profile and also boost your credit score if the results come back favorable.
Limiting Your Personal Liability on Credit with Business Credit
Okay, so now we get into the good stuff. One of the biggest advantages of business credit is that you get to limit your personal liability and guarantees on the credit you establish. This part is pretty straight forward, so I won’t spend too much time on this section.
The way you’re going to limit personal guarantees on business credit is by racking up the number of trade lines that appear on your business credit profile. In essence, trade lines are purchases from different vendors that report on your business credit profile. The more positive trade lines you have, the stronger the cases you make to other creditors down the road when you apply for credit, not to have a personal guarantee. So, in the initial phases of building business credit, be sure to rack up as many trade lines as possible with vendors who report payment history. We’ll touch on this more later.
Quick Tip for Limiting Personal Guarantees
Some credit applications that you come across will require that you fill out the section about your personal information (SSN, Name, DOB, etc.). But just because it may be a requirement when filling out online forms doesn’t mean that you have to provide this information in order to be approved for credit. Most people don’t know that a paper application that can be scanned and forwarded to the credit can be acceptable as well. A paper application gives you the ability to ignore the section(s) of the application pertaining to personal information, yet still submit the application. This also works with phone applications. If the representative over the phone requests your personal information, politely ask that they run the application off of the strength of your business credit. This works with most creditors.
Business Formation & Corporate Structure
Moving on to step number two – forming your business. But before I get to in depth about this part, I want to point something out…
You don’t need to have an operational business in order to build business credit.
A common misconception is that you need to have an active business that is bringing in money and/or providing services in order to garner business credit, but that is a myth. Now, while you do need a business in order to secure large business loans, home purchases, and car financing, you can still accumulate well over six figures in business credit without ever selling a single piece of merchandise or without ever providing a single service. Nonetheless though, you will still need to determine a business structure and incorporate your business.
If you were to compare this stage in business credit building to your personal credit, this step would be considered the naming phase. Your personal credit is differentiated by everyone else personal credit because of your given birth name and your unique social security number. Incorporating your business and giving it a name lets creditors know who you are amongst a large pool of other businesses so this part is important.
Choosing a name for your business
Before you can incorporate your business, you’ll have to choose a name. Once you’ve decided the name that you would like to use, run it through a business name search and see if it’s available. You may also want to do a domain name search as well in case you decide to put together a website which is highly recommended even if you don’t anticipate much business activity. After you’ve confirmed the availability of your new business name, it’s time to incorporate.
Choosing a corporate structure
I’m going to make this simple for you so that you don’t waste too much time thinking about this. If your primary goal for building business credit is to limit your liability on credit, or obtain low interest capital to invest with, a simple Limited Liability Corporation (LLC) or Sole Proprietorship would suit you just fine.
However, if you aim to start or expand a business and foresee having employees and significant sales, then you may want to put more time into making your selection. LegalZoom.com is a good resource for a quick and bare bones approach to finding out which entity structure will work best for you.
Once you’ve identified which business structure works best for your goals and objectives, next you’ll want to incorporate your business using a service like LegalZoom.com.
The turnaround time for incorporating your business can take as much as one to three weeks. Once you’re business is official incorporated, you’re ready for step 3.
Quick Tip for Incorporating Your Business
When in Rome, do what the Roman’s do. Most businesses now days incorporate in Nevada or Delaware due to the fact that they have a relaxed tax structure and that they don’t have high cost annual state licensing fees. So, if you’re looking for some deep savings, consider filing in Delaware or Nevada. Note that you do not need to physically go to either of these locations to incorporate there nor do you need to have a physical location there.