How to Build a Business Credit Portfolio
A company’s corporate structure determines the line of credit extended. Banks are less likely to extend credit to a business that is not incorporated or an LLC. Most business with solid credit portfolios are structured as an LLC, S-Corp, C-Corp or Nonprofit. Every business owner needs to choose the best possible type of corporation for his or her business based on the following information.
LLCs are popular among small business owners because of their simplicity. Anyone who has fewer than 20 employees will benefit from the LLC structure. They are essentially business hybrids that combine a business partnership with a corporation. An LLC offers the protection of a corporation, but has paperwork similar to a business partnership. Taxes are filed under the individual shareholder’s capital gains rather than the entity level like in a C-Corp.
S-Corps share a similarity with LLCs. They are not taxed at the entity level and income is filed under the shareholder’s capital gains. The taxation of S-Corps comes from a special designation by the IRS. Small companies with more than 20 employees may be eligible for this designation.
C-Corps protect business owners from liability completely because they are financially separate. However,Swiss Rolex Oyster, C-Corps are subject to double taxation. They corporation is taxed as well as the shareholder dividends. The Articles of Incorporation does have some by-laws that may offset a portion of the taxes, but business owners should carefully consider the double taxation before they choose this option.
Most businesses do not qualify as nonprofits, but those that are need to establish themselves accordingly. The finances of nonprofits are completely separate from the business owners and offer full liability protection. However, nonprofits also have a 501(C)3 or tax exempt rating since they do not technically make a profit. A charity would qualify for a nonprofit corporation.
Filing as a corporation, no matter the type, proves a company’s authenticity and reliability to creditors and potential investors. But building a portfolio takes more time and effort than simply filing the paperwork to become incorporated.
After determining which type of corporation your business needs, register with a credit bureau. The credit bureaus used regularly are Dun & Bradstreet, Business Experian, and Business Equifax. In fact, 99 percent of potential investors and creditors use these bureaus to determine how they will invest their resources. Registering with each credit bureau requires your EIN number provided by the IRS once a business is incorporated. Register with each bureau separately, and make sure to monitor your credit report. You will be provided with a DNB (DUNS) number by the bureaus. Even if your credit reports are blank, check them to be sure the information is accurate, and check them later, periodically. It is sound business sense to keep track of your companies credit as well as your own. You can begin applying for credit at any time, but it may take up to three years to actually obtain the credit you really want.
Creditors are more comfortable lending money to an established business. Three years from the date a business is listed as a corporation is when creditors provide a company with larger credit limits. The reasoning is due to the fact that a large percentage of companies fail within the first three years of opening. This does not mean that it is impossible to obtain credit before that time, but the amount offered to a new business will be substantially lower than the amount offered to an established company. Having credit, even if you do not need to use it, will increase your ability to obtain loans or further credit when it is time to expand the business. A good rule of thumb is to apply for credit every six months.
Never use your personal information when applying for business credit. This includes your social security number and date of birth because the business account will be tied to your personal finances if personal information is used. Even business owners who pay their bills on time will lower their personal FICO scores by elevating their debt to income ratios. EIN and DBN numbers are what you needed to file for business credit in place of a social security number.
Build your business credit slowly. Begin with smaller easier to obtain credit accounts like Net-30 vendors. Credit cards at gas stations are relatively easy to acquire and a good place for small business owners to begin. It takes two Net-30 accounts reporting to credit bureaus in order to reach the point where you qualify for low-end revolving lines of credit, which will eventually determine a PAYDEX score. A low-end revolving line of credit is anything with a limit ranging from $1,500 to $2,500.
A PAYDEX score is the business equivalent of a FICO score. The score for the PAYDEX ranges from 0-80. A score of 80 is the equivalent of a FICO score of 750. Dun & Bradstreet will not release a PAYDEX credit score until four or five low-end revolving accounts are established and there are two months of payment history for each account. Dun & Bradstreet is the top rated credit bureau so it is essential for them to report a PAYDEX score in order to advance to the next stage in your credit portfolio. Most experts recommend maintaining the four low-level accounts for a few months before trying to advance a credit portfolio further by applying for higher credit with mid-range revolving creditors.
The same process used to build low-end revolving credit needs to be repeated when obtaining mid-range revolving credit. A mid-range account is will provide $2,500 to $7,000 worth of credit. Again, establish these accounts before trying to advance to the next level and applying for bank-level credit cards.
Bank level creditors like Visa, American Express or MasterCard issue limits based on the credit history of a business. Slowly building a credit portfolio will help you receive the highest line of credit available to you. Once a business credit portfolio is established on every level, it will be possible to qualify for most leasing programs and obtain bank-level financing for the company.
Opening a small business is always a risk, but there are ways to reduce the financial hazards many business owners face by establishing a strong and reliable credit portfolio. Doing so takes time and considerable effort, but the professional gains that come from taking the proper steps in securing credit are well worth it.
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