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Read the Following Article to Learn Why You Need Business Credit

Why Do You Need Business Credit?

The Small Business Administration’s statistics show that less than half of the small business startups survive their first five years of operation. While the failure rate seems extremely high, it is not surprising to business experts. Many a business owner thought they had a good idea and could not wait to make it into a business. The result is that many businesses were set up without proper structures and preparations. They were flawed.

These business owners thought that once the business took off, they would come back and re-organize the company. However, they failed to recognize the amount of work entailed in running a business. Almost all of them never had the chance to remedy the flaws. Unpredictability is one of the most prominent features of the business world. These flawed businesses often lacked the tolerance to weather the ups and downs. Many business owners simply fail to plan.

In fact, the following story demonstrates this scenario:

Josh owns a small business—a tutoring center. He started the center from scratch 5 years ago after obtaining a bank loan on his personal credit. He was so excited about his business idea that he just wanted to get it up and running as soon as possible. After a slow initial two-month period, the tutoring center turned out to be a success. Josh now has about 100 long term students and 10 independent contractors as tutors working for him.

Josh’s business boomed faster than he expected and he operated it as a sole proprietorship. When he first started it, he figured that once the business is stable he would re-structure the whole thing. But he became so busy with the center that he never had the time to deal with it. He got a few credit cards with his business name on it, but pretty soon they were filled by his personal expenses from careless spending. He also was not sure whether his previous tax returns were filed correctly.

Even though the center has been generating a large amount of income, Josh eventually started to feel that the work load he put in and the troubles he had to deal with were larger than the compensation he was receiving. He found himself spending hours each day doing menial tasks that a minimum wage worker could do. The center was not running efficiently. He wanted to better utilize his time by expanding. Unfortunately, Josh missed a few bills during the initial two months and his personal credit was damaged. As a result, he discovered that he could not get any new funding from the banks. To make matters worse, the business appraisal came back lower than he expected. He did not understand why. Either way, Josh is now stuck.

What can Josh do to get out of this situation?

Josh’s problems are shared by many other business owners. What these people need is more than a quick fix. For Josh, even though his tutoring center is a profit generating business, it has some serious problems at its very foundation. That is why it could only grow to a certain point. What Josh needs to resolve these problems is a systematic and well-designed program to separate his own identity from his tutoring center.

Think of it this way: the tutoring center is Josh’s baby - it is very attached to him and requires constant supervision. Until the baby grows up and becomes an independent, it will always require Josh’s constant attention. Further, if Josh does not take care of himself, the baby will suffer because it is dependent on him. The baby needs to grow up and become an adult before it will be self-sufficient and able to survive on its own. In other words, the tutoring center will need to be able to stand on its own feet and have a separate identity before it can quit being dependant on Josh.

So how should Josh make the Tutoring Center Independent?

Step One: Create an Entity

In order to begin the process of fixing his problems, Josh would first need to separate the business from him. He needs to turn the tutoring center into a legally recognized individual—a business entity. A variety of entities could be formed: C-corporation, S-corporation, limited liability company, etc.

Just like raising your child, you want to raise it right. You should consult an attorney to determine which entity is best suited for your type of business and have the attorney set it up for you. Do not use the do-it-yourself forms out there or buy an abandoned entity. It may be cheaper up front, but they come with baggage and potential liabilities. Further, if you ever have to utilize the entity in litigation, in front of the IRS, or when dealing with a bank or lender, the Internet Special du jour will not be worth the paper it was written on.

There are many reasons why a person should conduct business within an entity. One of the most important reasons is asset protection. Without an entity, a business owner puts his personal and family finances at risk. When an entity is properly set up, these risks are largely, if not, entirely averted. The same goes also for the entity. The entity is protected from liabilities that can stem from the business owner’s personal life. For example, let’s say a student fell and broke her arm at Josh’s tutoring center because Josh did not see a wet spot on the floor. The only assets that would be exposed to the students’ claim would be the amount invested in the tutoring center (if the center was structured in the proper entity). The student could not claim interests in Josh’s house, car, or his personal savings account. Likewise, if Josh causes a car accident and is sued, the plaintiff will not be able to liquidate Josh’s tutoring.

Step Two: Establishing Business Credit

“Business credit? Wait, Josh already has business credit cards!” you might say. Josh’s business credit cards are really just personal credit cards with the business’s name on them. They are not true business credit cards. They are based on his personal credit and report only to his personal credit profile. This is because he operates his tutoring center as a sole proprietorship.

The sole proprietorship is not legally separated from his identity. To the credit bureaus, the tutoring center is Josh, and vice versa. Therefore, assuming that business decreases at the tutoring center and Josh miss a few months of payments on these cards, the consequences are not only that he damages his own credit scores, but his lenders could take away his other “personal” credit cards, home equity line of credit, hike his interest rates, etc. It has the potential to cause collateral damage to his personal life.

The “business credit” I am referring to is true business credit - it is a separate credit profile for your business and for the business entity. It has nothing to do with your identity. Just like you have your own personal credit profile with each personal credit bureau, your business should also have its own credit profile with each business credit bureau. The business credit profile would establish the creditworthiness of your business just like personal credit would to yours. It enables the business to be treated as an individual by the lenders, potential investors, and the business world. It allows your business to obtain funding, loans, and trade lines. In other words, it gives meaning and substance to your business’s identity.

Similar to building your own personal credit, it takes time to build up the business credit. The major difference is that a personal credit profile is automatically established for you when you obtained your first credit card, car loans, etc., but it is a lot more complex in the business credit scenario. A business could be “in business” for many years, but never considered a “business” by the business credit bureaus. The reasons could vary, such as improperly set up bank accounts or the lack of a business structure, mistaken or inconsistent listed names, unconfirmed business address and phone lines, etc. There are too many to mention. The point is that business credit is something you have to be deliberate about and take steps to establish.

Business credit is also not protected like your personal credit. The Fair Credit Reporting Act gives individuals the ability to view and dispute for free the inaccuracies in their personal credit reports. However, the Act does not apply to business credit.

Business credit reports and the bureaus are much less transparent to the public. Disputes are harder to initiate and red flags are almost impossible to remove. This is a huge disadvantage because a wrong credit profile can deny your business many benefits it entitles to otherwise. It is common knowledge how inaccurate personal reports can be. What makes you think that your business credit report is any better? This is not something you leave to chance.

Since not that many business owners out there realize the importance of having good business credit, this translates into a distinct advantage for a business that has one without even realizing it. How could you make this into an advantage? Imagine all businesses out there as people. Most of these people would either have no credit or bad credit. When your business, one that actually has a solid credit profile and good credit shows up, naturally it stands out to the lenders, bankers, or your business partners because it has taken the time to build a solid business credit. They would compete for your business – you would stand out in the crowd.

The result of this competition is that you would receive many benefits. First, if you need financing, you could obtain a much lower interest rate on loans, credit lines, working capital, etc. You could save thousands in the form of lower interest payments. Additionally, your business could bypass a broker for loans because of its good credit.

Building good business credit requires careful management of your business’s finances and operations. A business that has good credit essentially has proved that it is a reliable, profitable, and a smart business with a good track record. In the lenders’ eyes, funding this business would be a safe risk to take on. In the investors’ and the business partners’ eyes, this business would be ideal to joint venture with. In other words, good business credit creates opportunities for you and your business.

Further, having good business credit establishes the underlying value in your business. The ability to obtain financing whenever it is needed and having a good track record combines to become an extremely valuable asset for your business. It increases the value of your business. This “good will” attached to your business can easily translate into potential profits such as licensing revenues or expansions. In the long run, your business becomes self-sustainable. In the event you want to sell the business, the compensation would be much more handsome as a result.

As previously mentioned, building up business credit can take a long time, especially when you do not know how. You are like a blind mouse running in a maze - you might never get out and even if you do, it will probably take an unnecessarily long time.

Many businesses do not consider funding opportunities when they do not need it. However, the catch is that when they need it, they can never get it. That is because in all likelihood, their businesses are no longer a safe risk for lenders. Unforeseeable events do happen in the business world and lenders would not discriminate against your business just because it is asking for funding. When you show up unprepared, without business credit and a plan, it discredits your business and your ability as a business owner and manager. Your reputation within the business community, poof, GONE! There are just too many business loans declined like that.

Do not do that to yourself.

To do it right the first time, the best way is to consult with a professional such as a business credit counselor and learn the ins and outs of the whole process. Just like running a business, you need a business plan. When building your business credit, you need a guide as well. This way it ensures that you are efficient and that you get to the goals in the least amount of time possible.

At BOSS, we can help. We know the best credit builders in the business and work with over 1000 lenders who lend to businesses. Call us at 888-969-2677 or take our funding test to see if you already qualify for funding:

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