Establishing business credit: part 2
(Editor’s note: This is the second of two parts. Read part 1.)
Here are the seven steps critical to establishing business credit:
1. Company Legal Structure – The business must be a legal entity unto itself in order to establish business credit. Therefore, it is recommended to form a corporation (C Corp) or LLC (discuss with your CPA the advantage/disadvantages of a C Corp versus LLC) as opposed to structuring your business as a sole proprietorship or partnership. Formation of a sole proprietorship or partnership, dictates that personal credit information could be included on the business credit report. Additionally, as a sole proprietor or partner in a partnership, you are personally liable for the debts of the business and all your personal assets are at risk in the event of litigation.
Corporations and LLC’s, on the other hand, provide the business owners liability protection, and can build a business credit profile that’s separate from the personal credit profile. Therefore, apply for credit under your business’s name and find businesses will to grant credit without a personal credit check or guarantee.
Remember – obtain an FIN or EIN from the IRS at the www.irs.gov
2. Register with Business Credit Agencies – The best known business credit bureau is Dun & Bradstreet (www.dnb.com). Dun & Bradstreet has a process on their web site to establish a D-U-N-S number (a specific 9 digit number related to your business) and instructions how to establish a business credit rating. It is strongly recommended that you contact D&B and follow their process to establish business credit. The following is from the D&B web site:
How do I get started with D&B? With our unsurpassed global data collection system, D&B continually gathers the data that initiates the creation of business credit profiles on new companies. Many kinds of activities can trigger a profile on a new company, such as incorporating your business, applying for a loan, getting a business telephone number, taking out a lease on office space – even just when another company seeks information from D&B about your business.
Still, a new business may not have a complete business credit profile. Getting a D-U-N-S Number from D&B – the worldwide standard for business classification systems – is an essential part of helping you establish your business credit profile and will ensure that when a company looks you up in the D&B database they will find you. In some cases, a D&B D-U-N-S Number is so a requirement for doing business some entities, such as the US government.
You should make sure you have a D&B business credit profile if:
• You are planning to obtain a business loan
• You need to purchase or lease equipment
• Your cash flow is tight
• You want to ensure you are getting a fair deal from lenders compared to your competition
• You want to pay net 30 days instead of COD (Cash On Delivery)
• You are paying interest at prime plus 1, or even higher
• You plan to do business with entities that require a D-U-N-S® Number, e.g. the US Government
These issues and dozens other like them can be addressed by having a strong business credit profile. A good rating provides you with the financial freedom to take the steps you need to grow, and is a straightforward, unbiased method for other companies to assess your level of risk when considering taking you on as a creditor. A poor credit rating is a certain barrier to growth and success, preventing you from getting adequate funding on fair terms.
Communicating directly with D&B will help establish your business credit in less time. If you are a new company, D&B can help you build a complete business credit profile from the ground up; if you have been in operation for a while, you will want to improve and/or protect your business credit profile. Find out more about how to establish, monitor, improve, or protect your business credit.
3. Credit Market Requirements – Businesses must meet all the requirements of the credit market in order to have a higher probability of credit approval, as not being in compliance with the credit market can “send up signal flares” with both credit bureaus and potential grantors of business credit. Some of the “signal flares” include:
• not having a business license,
• not being registered with the Secretary of State for a certificate of good standing,
• operating under your social security number rather than a FIN or EIN,
• not having a phone line (land line) that is listed in the phone directory in the exact business legal name,
• no web site, or
• not having a business email address (not AOL or gmail, but a specific URL for your company).
4. Small Business Credit Lines – Investigate and locate a minimum of five businesses (vendors/suppliers) willing to grant a small business credit without personal guarantees and will report the payment experiences to the business credit bureaus. This will assist your business to establish a credit report and build a financial credit foundation for the company. Find companies willing to grant credit that report to the credit bureaus such as UPS, FEDEX, www.marketingoncredit.com.
5. Business Credit Cards – Obtain three business credit cards (Sam’s Club Discover Business card), that are not linked to you personally and that report the business credit to the reporting agencies. Then be sure to always pay your bills on time!
6. Financial Statements, Business Plans and Loan Packages – These documents are often required by many credit grantors as part of their loan application process. CxO To GO (www.CxOToGo.com ) is a national professional services firm that has assisted many business with their financial statement preparation and business plans. Additionally, CxO To Go has packages such as PowerPlanTM and PowerPlan2TM for business plans, PowerPuncherTM for executive summaries, CFOCastTM for financial projections and BankSellTM for bank proposals so lenders and bankers will take action. It is important to note that 61 percent of all businesses are turned down for a loan due to a poor loan package, however with BankSellTM the lender loan package gets results and moves the applicant to the top of the list for review and credit committee approval.
7. Debt management – Be a smart money manager and manage the debt levels to ensure they are not too burdensome and can be paid back with current cash flow. Do not incur debt that will over leverage the company and cause missed or late payments.