How to Build a Credit Identity for a Business

Building a Credit Identity for a Business

Any company seeking to build a credit record should take steps to build a credit identity. Although there is no "one-size-fits-all" approach to doing this, the accepted wisdom on the subject is that you should do as much as you can to give your company a firm hold within the credit industry in order to ensure that you can take advantage of the opportunities. Spreading your credit as far and wide as possible is advisable, as long as you make sure that you never have more going out than you have coming in. The most straightforward way of achieving this is to start small and grow your credit channels at the same time as your business is growing. At every turn where you apply for credit, make sure that you have clarity on whether you can afford to pay it back, especially if your profits are hit by a market crisis or other unforeseen circumstance.

The first step you need to take is to register your company with the correct bodies. In order to do this, you will have to decide what the legal structure of your business will be. In most cases, the best way to gain funding for a business with less risk of punitive action should it fail is to set it up as a Limited Liability Company (LLC) or a corporation. Both of these forms of business will usually need to be registered with the state and local governments. If you are operating as a sole proprietor, this will not be the case; but you will be required in most states to operate solely under your own name. Registering with the state in which the business will operate as an LLC or a corporation will offer you the protections under the law that keep you safe from extensive action in the case of the business going bankrupt.

Once you have registered with the state government, you have effectively created a new entity. Corporations in particular are very much treated as individual humans under the law. The same rights and protections exist as for an individual human being, while the legal requirements placed upon a corporation also equate to those of an individual. This means that a corporation can face trial for the crimes of corporate manslaughter or fraud, and if it is found that the corporation is guilty, then the person or persons who created it will face legal action. It also means that a corporation can sue as a separate entity without prejudicing the individual rights of its members.

What registering means in terms of credit is really quite simple. It gives a company a separate identity and allows it to establish credit on its own. As banks are generally willing to loan money in greater amounts and on more generous terms to a company than to an individual, there is a clear advantage to registering with your local and state governments at your earliest convenience. What needs to be foremost in your mind in all issues of business is the fact that a separate identity for your business is crucial. While we all like a company with a sympathetic public face, and an individual presence is important for that, the fact is that a brand with a strong identity will get attention and build confidence. Think of it this way: When people are dealing with you in a business setting, you would be well-advised to ensure that they are not thinking you are the business, but that you are at the forefront of the business. It is, in a way, the principle of safety in numbers: There is you, then there is the company.

In gaining this identity, you need not only to be registered with government bodies but with the credit bureaus if you have the intention of really pushing your business. Do not assume that there is no point registering with the other credit bureaus if you are already registered with one. You will find that different lenders refer to different bureaus when they are evaluating your entitlement to credit. Some will refer to more than one, so if you build a credit record with only one of these bureaus, it will affect your business credit entitlement negatively. This is often referred to as a "belt and suspenders" approach. Making sure that you are covered in all eventualities will put you firmly in the driver's seat when it comes to applying for credit to steer your business forward.

Upon registering with the different credit bureaus, you should also make sure that you take a proactive approach to informing them of when you have met bills and paid off credit. The reason for this is that sometimes the lender to whom you have made the payment will not have done so. Mistakes on credit reports are more frequent than you would think, so ensuring that mistakes are minimized and any that do happen are corrected is absolutely essential. When you apply for further credit, those mistakes could hurt you more than you would ever imagine and could be the difference between growing a company to its absolute limit and stagnating early on. Therefore, it is essential that you build a strong identity for your company and firmly control it from then on. It can be the difference between getting that credit and not, whether from a bank or lender or an office supply store in the next town over.

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When setting up a new company or extending your present one, it is almost guaranteed that you will need to rely on credit to get where you want to go. At least initially, getting hold of some money is not going to be easy, and you will have staff to pay, bills to take care of, and supplies to buy. Moreover, if you want to set up your own premises, that means you will need to borrow a little bit more on top of those other expenses. There is so much to take care of and, early on, you will find that one thing comes on top of another, leaving you almost breathless as you try to keep up with the outgoing funds. Just about every business has to borrow some money in order to keep things moving in the early days and then pay it back out of the company's profits once things are moving smoothly.

A start-up loan is the first credit that most businesses will apply for. As the name suggests, it enables a company to start to operate in the period when it has no past profits to draw on. Generally, from a start-up loan, a business can purchase the goods that it needs in order to operate properly; pay for needed services, such as utility bills, leasing premises, and advertising; and with some left over, it can also potentially pay some staff. Equally, with a commercial property loan or mortgage, the borrower can buy premises; although, especially in the current climate, many business owners choose to rent premises until they have an established presence in the area where they operate. The most important thing is that the business has a place to operate.

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If the owner or owners of a business are thinking long term, they may also look to set up credit accounts with a range of suppliers. This policy will cover various things. If the new business is a restaurant, for example, the owners may try to arrange a credit account with a local wholesaler that can supply them with ingredients. A new cleaning company may look for an account with a supplier of industrial cleaning products, while an office-based company will require office supplies, such as stationery and possibly office machines. Many telecommunications companies also have business divisions that will take the fact that the business will be using them for a period as a good enough guarantee of future earnings to extend a line of credit that allows the company to have telephone lines and broadband Internet for a reduced initial rate.

Many business owners also will have a business credit card. One of the biggest mistakes that new business owners make is to get a card in their own name; as we have seen, this has the undesirable outcome of tying the individual's credit record to that of the company. If your business hits troubled times, you may well find yourself in a position where you need personal credit more than ever before. To be in this position and be unable to get any kind of personal credit because your record is tied to that of a business that is not meeting its payments means that you are being punished on two fronts and are unable to get the leeway that you need when you need it most.

It is therefore desirable to apply for a business credit card in the business name. As well as keeping things compartmentalized and preventing a situation where the spending of a business interferes with individual living costs, these cards often have the advantage of higher credit limits and business-specific reward packages. This is more beneficial than it may sound. Frequently these rewards include preferential rates on the very things that a business needs in order to keep things ticking along. These perks may include air fares, car rentals, and other travel expenses, as well as business equipment. More than one business customer has been able to get a laptop computer at a preferential rate, and it can be quite useful to have access to important documents on a computer while traveling.

One other element of business credit that may come in extremely handy is an overdraft. Although the word "overdraft" is greeted with stony-faced horror by many, it is something that can be the salvation of many a company as long as it is treated as the emergency fallback that it is intended to be.

What an approved overdraft gives the customer is a safety net should costs reach such a point that the party's account has a debit balance, or one that is less than zero. If you have no overdraft protection on an account and this happens, then you are liable to have a charge applied to your account that will result in money being taken from you on a specified date.

By agreeing to an overdraft, such charges are avoided. An overdraft facility is beneficial on a business account because it allows the customer to operate flexibly without incurring penalties. However, the most important thing to remember is that in a torrid financial climate, or if banks believe the overdraft agreement is being abused, then the institutions are within their rights to end the agreement and "call it in." This has the effect of leaving the customer unable to operate the account until funding it with a deposit that brings it back into credit. In addition, depending on the conduct of the account, it may well be difficult to get a bank to approve another overdraft agreement even after the account is corrected.

Finally, further loans can be taken out to allow a business to invest in something that will bring the company to a new level. Some businesses find that they outgrow their initial aims and their services are coveted in other cities or countries, or just by a far greater number of people, thus requiring more staff, more supplies, a larger office or premises, or any combination of the above. To allow this expansion, companies may take out a loan to secure what they need with the proviso that they will be able to pay it back with continued expansion of their customer base.