SANTA TERESA, N.M., April 20, 2018 /PRNewswire/ -- Interstate Capital, one of the largest invoice factoring firms in North America, reveals ways in which business owners can build good business credit in spite of having bad personal credit.
According to the Federal Reserve Bank of New York, over 50 percent of small business owners who apply for loans are rejected. One of the main reasons? Poor credit.
Due to a range of personal financial factors, such as college debt, divorce or bankruptcy, many entrepreneurs do not have good personal credit. The good news is that, in order to build good business credit, entrepreneurs do not have to wait until their personal financial situation is in solid form.
Here are four tips to help business owners get started:
1. Differentiate personal credit from business credit
If a business owner's personal credit score is damaged, they should consider getting a separate tax ID number for their business. They don't necessarily have to incorporate their business; they can still get a tax ID number from the IRS if the business is a sole proprietorship, an LLC or a partnership. Business owners may talk to a CPA for information on the different options.
In addition to getting a tax ID number, it's a good idea to set up the business to be distinct from a personal profile. This step involves acquiring a separate business address (not a post office box), a business bank account, an official corporate name registered with local authorities and a separate telephone number.
A business credit score is linked to the tax ID for a business owner's business, not his/her Social Security number. This important difference can help business owner's build positive business credit history and gain major momentum in their business.
Besides the additional capital that business owners can borrow, there are other reasons why business owners should keep their personal credit profile separate from their business credit profile.
- With a business lender, such as a bank, a business owner is contractually obligated to pay the loan back, whether through collateral or company profits. If the two are not separate and the business collapses, a business owner's personal savings and personal assets could be at risk.
- Having separate business credit safeguards personal credit scores. Business owners who rely solely on personal credit cards to fund their operations often often end up maxing-out their credit lines, risking damage to their personal credit.
2. Build the business's credit score
Once a business owner has a tax ID number and a legal identity for the business, they can start building the business's credit history and qualifying for trade and credit lines from suppliers and funding sources.
Start by opening a business credit card and always paying on time. When applying for a business card, be sure to verify that the card provider reports to business credit bureaus and not to personal ones. The business credit bureaus will add payment history to the credit file associated with the company name. Unlike personal cards, business owners may be able to deduct interest from business credit cards.
For vendors and suppliers, business owners should open credit lines and make payments on time, so positive payment activity can be reported to commercial bureaus. This is known as trade credit. It typically allows business owners net 15, 30, or 60 days to pay for supplies and services. These suppliers will automatically report the business owner's activity to bureaus and establish a credit report for the business.
As business owners establish a consistent history of on-time or early payments with these suppliers, their business credit scores will increase. If business owners are able to stay on track with their payments, they can establish a strong credit rating for their business.
3. Monitor business credit regularly
After establishing strong business credit, business owners will need to check it regularly. Because credit scores could change in just a short time span (several months), lenders and creditors re-assess a company's creditworthiness on an ongoing basis. If a business owner's credit deteriorates, credit terms can be adjusted, stopped altogether and the business owner could be forced to pay cash on delivery for supplies.
4. Choose Invoice Factoring
Invoice factoring offers an innovative way to turn invoices into immediate cash. With invoice factoring, the business owner receives an advance on the customer invoice, so the business owner does not have to wait weeks and months for payment. Factoring is not a loan and therefore does not require credit checks. With the cash flow that factoring brings, business owners can continue to pay their suppliers on time, which reflects positively on the business owner's credit report.
Small business owners may feel like they are at a disadvantage. But, building a strong business credit profile separate from personal credit is an easy way to give them the edge. By following a few simple steps, they can establish a strong business credit score, enabling them to access better loans at better rates and up to 100 times more credit than they could as a consumer.
Regardless of a company's industry or financial situation, invoice factoring represents a reliable debt-free financing solution. The factoring specialists at Interstate Capital, one of North America's leading factoring companies, can help business owners decide if factoring is the right cash flow solution for them. Since 1993, more than 10,000 companies have chosen Interstate Capital as their factoring partner for financial peace of mind and growth.
SOURCE Interstate Capital