As an entrepreneur and business owner, one of the most important things you should be keeping a close eye on is the financial position of your business. Managing cash flows, using accounting to help your bottom line, and using debt when appropriate to grow your business are small business fundamentals every entrepreneur needs to know about.
One area that continues to be an issue, however, is business credit and obtaining financing to grow your business.
Although obtaining consistent and affordable business credit can make the difference between staying in business or failing, and that many businesses fail due to lack of cash flow, there are gaps in what business owners know about this issue.
The American Dream Gap Report found that 45 percent of small business owners didn't even know they had a business credit score, and over 80 percent of survey participants were unsure how to interpret the score. Additionally, and according to the 2016 Federal Reserve Small Business survey, 61 percent of participants indicated they had faced financial challenges in the past year, and the number one challenge was access to credit.
Always be sure to consult your CPA or financial advisor before making changes to your businesses structure.
Let's take a look at five steps you can take to improve your credit, and get your business the capital it needs to grow:
1. Separate your business and personal finances.
Commingling of funds, in addition to representing the basis for possible fraud in some cases, means your business won't be able to build its own credit score and history. Maintaining distinct accounts and credit cards for your business gives you the opportunity to establish your business credit, improve it over time, and obtain the financing your business needs.
Best of all is to set up an LLC, or whatever business structure works best to legally separate you and your business. While it is important to work with CPA or tax professional to avoid unexpected tax penalties, LLC's offer several benefits for startups and new businesses, including the ease of setting one up, and flexibility once you are up and running.
2. Get an Employer Identification Number (EIN)
Think of the EIN like a social security number for your business. Obtaining an EIN is required for federal taxes, and also provides your business with additional validity in the eyes of creditors. If you want to open a business bank account, which is always a good idea, you are going to need an EIN. Finally, if you are a supplier or customer of a larger business, they might require you to provide them with your EIN.
Fortunately the IRS has a simple to use online application portal that walks you through this process, including helping you make you sure have all the necessary paperwork on hand before you begin.
3. Establish your business with the credit agencies.
Opening a business file with the three major credit reporting agencies, Experian, Equifax, and TransUnion, means that your business is now on the radar at the institutions. This may not seem terribly important, but the only way to build a credit history is for your business vendors to report your business payment history to these agencies.
Once you have your EIN (step 2 above), this process is relatively straight forward -- simply go directly to the credit bureau site and follow the prompt to register your business.
4. Set up a business account and credit cards.
Setting up a business account, and obtaining business credit cards might be the first step that comes to mind to help building business credit, but these steps can't be correctly executed without completing the first three steps.
Establishing a payment history on business credit cards, making regular deposits and paying bills out of a business account, and making sure you are on top of your business credit score will definitely improve it.
Don't forget -- to set up a business bank account and/or open business credit cards you should have a legal structure for your business, and will need your EIN.
5. Pay early and in full if possible.
These are ideas that are the same for improving personal credit and business credit, but for your business it is arguably more important. Your businesses credit score will have a direct link to how much you pay in fees and interest, or if you even qualify for financing at all.
Once great method to ensure on-time payments is to link your business account to one of the many free budgeting apps, set your notifications on, and leverage technology to help you manage your payments.
Remember, every dollar you pay in fees and interest do nothing to help your business, and just detracts from your profitability, and improving your business credit will save you headaches and money this year.