Many people wonder how they can start their business without using their personal credit. The fact is, it’s hard to avoid involving your personal credit when you start a new business, but you CAN work on building business credit instead. So what is business credit?
*By the way, Written Success partners with high-integrity providers who SPECIFICALLY help startups and businesses in all stages who need funding.
What Is Business Credit?
Just like a person can borrow money from lenders, so can a business. Building business credit works roughly the same way as personal credit. If your business has credit, it will also have a credit score. Lenders look at things — like your business revenue, ability to pay, and payment history — when deciding if your business is creditworthy.
When leveraging your business credit in the future, you will likely need to cosign using your personal credit. The good news is that there are early steps you can take to help build your business credit. This will help support or offset any problems you may have with your personal credit.
Now that we’ve answered the “What is business credit?” question, here are three steps to take to build your business credit before your business is fully operational.
Step 1: Form Your LLC
It is most common for small businesses to open their doors under an LLC entity. This is usually most appropriate. It can protect new owners from exposing their personal assets in the event of a business loss. Yet, it does not shield owners from needing to use personal credit to secure lending prior to grand opening.
Nonetheless, go ahead and form your LLC as soon as possible. If your grand open is a year or two down the line, you can start building business credit for it right now.
Worried about the name of your entity? Pick whatever name you want — you can always choose a DBA (doing business as) name later that suits your business, and it can operate under the LLC.
Step 2: Establish Business Accounts
One credit-building factor is having accounts paid off on time every month. Another factor is having several accounts open and in good standing. Once you form your LLC, you can open accounts under your entity and pay off your bills on time to build credit.
If your business is pre-operational, start simply by moving your cell phone plan to a business account. Sometimes, this will mean you must have five phone lines or some other stipulation depending on the carrier. While you may not need extra lines, you may find that the monthly bill is quite similar to your current plan.
That’s right! You might not pay much more for multiple lines under a business account versus having your personal phone lines.
*Remember: Only order data plans for the lines you will actually use.
If you currently run your business out of your home, you can expand this credit-building tactic to other areas, such as:
- Sign up for fleet cards, and use your card to get gas. It works like a credit card, and the account will be owned by your entity.
- Transition your cable and Internet to a business-class account. You will likely get better service if you run into issues, and find you have access to higher Internet speeds. Plus, your bill may only change by a small amount.
- Take advantage of one or two of the small credit card offers your new business receives in the mail within the first months of forming your LLC. Pick a good small business credit card with no annual fee and one with a small monthly service charge (think $7 or less). Put your phone, internet, or cable bill on auto-pay using this card.
Step 3: Go into Autopilot and Watch Your FICO Score
Now that you have a few business accounts, your only job is to pay them off in full each month. Over a year or more, doing this will build your business credit history. It will help your discussion later when you are asked how long you have been in business. If you are operating on any scale now — especially out of your home — these are immediate steps you should take to support the launch of your next phase.
Make sure you check your FICO score quarterly to watch how your number benefits from your actions. Many credit card providers offer free FICO scores with their service. Check with your account provider on how you can access your score easily.
Unless you have close to two years of strong business revenue, you will still find that lenders will drag your personal credit into the discussion for borrowing. This proof of credit history under your business name will help to focus the discussion on your business.
Becoming a business owner is an exciting time, and one of the most important things you need to ensure is that your business plan is done right.
Having support during this critical phase is important. If you have a business plan you need help with or are ready to start a new business plan from scratch, it’s critical to have support. Reach out for a free consult so we can chat about your business goals.