Small Business Credit – Is it a Mystery or Myth? Misconceptions Are Everywhere
A lot of people have never even heard of business credit. As a result, it may seem like a unicorn, or the Loch Ness Monster. There are a number of small business credit misconceptions out there. Let’s look at seven of them.
1. My Business Can Live Without It
Actually, no. Every business needs business credit! It’s the best way to cover expenses when cash isn’t coming in as quickly or as regularly as an entrepreneur would like.
Does anyone honestly think CEOs of large companies put their own assets on the line when their companies need money? Of course they don’t. Instead, they use their own business’s credit profile, its history and its behavior, to leverage credit when their company needs a cash infusion.
For sole proprietors, particularly when they are also starting up, the temptation to use personal funds to finance the business is nearly irresistible. But when a business and its owner are this intimately intertwined, it’s not good for either entity.
Business credit is credit in a small business’s name. It doesn’t link to a business owner’s consumer credit. And this is so even when the owner is a sole proprietor and the solitary employee of the company.
This is perhaps the biggest of all small business credit misconceptions.
2. My Business and I Are the Same So It Doesn’t Matter
Since small business credit is independent from the consumer, it helps to secure a business owner’s personal assets, in the event of a lawsuit or business insolvency. But what does this mean?
In essence, if a company goes under (and a lot of new companies do, no matter what’s going on with the economy, or how hard the owner works), business credit means an entrepreneur will not have to lose their house or their car. And a business owner’s personal credit scores don’t have to tank, either.
This can be one of the most damaging of all small business credit misconceptions.
3. My Business is a Startup so Just I’ll Go to My Bank Instead
Think startups can’t build business credit? Think again. Another advantage to business credit is that even startup ventures can do this. Plus….
Going to a bank for a business loan can be a formula for frustration. This is especially true if the economy starts to falter. For the recession of 2007 – 2009, the number of banks lending to small businesses went down. And even in recovery, lending was off. There’s no reason to expect something similar wouldn’t happen again, if the economy were to tank.
But not to worry. Building small business credit, when done properly, is a plan for success. And it doesn’t depend on the health of the economy or on banks. A company can build small business credit at any time.
This is one of those small business credit misconceptions which can really hurt startups.
4. The Credit Limits are Low and the Rates are High
This couldn’t be further from the truth.
Credit limits on business credit accounts are noticeably a lot higher than they are for consumer cards. A business owner can secure credit cards with $10,000 limits even after having a business credit score for only a few months. This is impossible to accomplish with personal credit.
And with 5 – 10 accounts reporting on the business credit report, an entrepreneur can qualify for several of business credit cards with limits of $10,000 or higher. A business owner can build massive amounts of business credit much, much faster than consumer credit.
Furthermore, the interest rates and incentives are similar, if not better on small business credit than they are for consumer credit.
This is maybe the most expensive of all small business credit misconceptions.
5. The Way My Business is Set Up Doesn’t Matter
Actually, it does matter. A lot. The idea is to exude business fundability. A small business has to be fundable to credit issuers and merchants. This is an area of business credit building which is something the entrepreneur can control.
To best build business fundability, a business will need a professional-looking website and email address. And it needs to have website hosting bought from a company such as GoDaddy.
Additionally, company phone and fax numbers must have a listing on 411.com. Also, the company phone number should be toll-free (800 exchange or similar).
A small business will also need a bank account devoted only to it.
- Licenses:
A business also has to have all of the licenses essential for operation. These licenses all have to be in the particular, appropriate name of the business. And they must have the same small business address and telephone numbers. So note, that this means not just state licenses, but potentially also city licenses. The Internal Revenue Service
Visit the Internal Revenue Service website and get an EIN for the small business. They’re totally free. Select a business entity such as corporation, LLC, etc.
A business can get started as a sole proprietor. But they will more than likely wish to switch to a variety of corporation or an LLC. This is in order to decrease risk. And it will take full advantage of tax benefits.
A business entity will matter when it concerns taxes and liability in the event of a lawsuit. A sole proprietorship means the business owner is it when it comes to liability and taxes. No one else is responsible.
If an entrepreneur runs a company as a sole proprietor, then at least they should file for a DBA. This is ‘doing business as’ status. If they do not, then the owner’s personal name is the same as the company name. Hence, an entrepreneur can end up being personally responsible for all business financial obligations.
And also, per the Internal Revenue Service, by having this structure there is a 1 in 7 probability of an IRS audit. There is a 1 in 50 chance for corporations! Prevent confusion and noticeably lower the chances of an Internal Revenue Service audit simultaneously.
- Getting a D-U-N-S Number and a PAYDEX Score:
Start at the D&B website and obtain a totally free D-U-N-S number. A D-U-N-S number is how D&B gets a business into their system, to produce a PAYDEX score. If there is no D-U-N-S number, then there is no record and no PAYDEX score.
Once in D&B’s system, also search Equifax and Experian’s sites for the small business. If there is a record with them, check it for correctness and completeness. If there are no records with them, that’s okay. Instead, it’s time to start building business credit.
Start with merchants which report to D&B. Three or four reported transactions, plus a D-U-N-S number, means a business will start to get a PAYDEX score.
This is one of those small business credit misconceptions which keeps entrepreneurs from taking charge of a company’s financial destiny.
6. Building Business Credit is Hard
Actually, no. It really just involves buying on credit from merchants which report, particularly to Dun & Bradstreet to start. This is credit from what is called the vendor credit tier.
- The Vendor Credit Tier:
With credit from merchants in the vendor credit tier (sometimes called trade credit or starter credit), a business will have an established credit profile. And then it will get a business credit score.
These sorts of accounts have the tendency to be for the things bought all the time. It is goods such as marketing materials, shipping boxes, outdoor workwear, ink and toner, and office furniture.
But to start with, what is trade credit? These trade lines are credit issuers who will give a small business initial credit when they have none now. Terms are oftentimes Net 30, instead of revolving.
Hence, if there is an approval for $1,000 in vendor credit and all of it is used, the business will need to pay that money back in a set term. This is, for example, within 30 days on a Net 30 account.
In comparison with revolving accounts, there is a set time when a company must pay back what was borrowed or the credit which was used.
Once a business has repaid what was used, then the account is on report to Dun & Bradstreet, Experian, or Equifax. And for vendors which report to more than one of the big business credit reporting bureaus, there can even be two payment experiences (say, one for D&B and one for Experian), which helps to build business credit even more quickly.
Not every vendor can help as true starter credit can. These are vendors that will grant approval with a minimum of effort.
- Moving Past the Vendor Credit Tier:
There need to be 5 to 8 vendor accounts reporting to any of the bigger business credit reporting agencies to move onto the next step, which is the retail credit tier. But a business may have to apply more than once to these vendors. So, this is to demonstrate reliability and the desire (and ability and record of doing so) to pay on time.
With an established business credit profile and score, a business can then start to acquire credit in the retail, fleet, and cash credit tiers.
This is another one of those small business credit misconceptions which can keep entrepreneurs from proactively taking control of a business’s financial future.
7. This is All Well and Good, but no Vendors Actually Report!
Here are three.
- Uline Shipping Supplies
Uline Shipping Supplies offers shipping, packing, and industrial supplies, and they report to D&B. A business must have a D-U-N-S number. Uline will ask for two references and a bank reference. The first few orders may need to be paid in advance to initially get approval for Net 30 terms.
- Quill
Quill sells office, packaging, and cleaning supplies, and they report to D&B and Experian. Because Quill reports to two separate credit reporting agencies, a business can get two credit experiences with them. Place an initial order first unless the D&B score is established. Usually they will put a business on a 90-day prepayment schedule. If a company can order items each month for 3 months, Quill will ordinarily approve that business for a Net 30 Account.
- Grainger Industrial Supply
Grainger Industrial Supply sells safety equipment, plumbing supplies, and more, and they report to D&B. A business must have a business license, EIN, and a D-U-N-S number. For less than a $1000 credit limit they will approve almost any person with a business license.
This is one of those small business credit misconceptions which can cost a company time and money.
Small Business Credit Building: Extra Information and Takeaways
Always use credit responsibly! A company should never borrow beyond what it can pay off. Paying off on schedule and in full will do more to raise business credit scores than virtually anything else.
Building small business credit pays off. Great business credit scores help a small business get loans. A credit issuer knows the business can pay its debts. They know the small business is for real.
The business’s EIN attaches to high scores and even lending institutions won’t feel the need to ask for a personal guarantee.
Small business credit misconceptions can hold back growth. But small business credit is no unicorn. It is an asset which can help any small business in years to come.
Bio: Janet Gershen-Siegel, a published author and Content Manager for Credit Suite, has an MS in Communications from Quinnipiac University, a JD from Widener Law School, and a BA from Boston University. She has been admitted to practice law for over 30 years, with a focus on litigation. She regularly writes for Credit Suite, which helps businesses build credit for their EIN that’s not linked to their SSN, and get approved for loans and credit lines.