December 28, 2012
Establishing Small Business Credit: A Catch-22
By Tracey E. Schelmetic, TMCnet Contributor
If you’re a small business owner, you probably will have faced this conundrum: you worked hard all your life to establish excellent credit, taking care to pay bills on time and be a good credit customer only to find once you opened your business, that doesn’t count (or if it does, you may not want it to). Now, of course, it’s your business that needs to establish good credit. Of course, without good business credit, no one will loan to you, and without loans to pay on time, you can’t build up good credit. It’s a Catch-22.
According to a recent article in YFS Magazine (“Young, Fabulous and Self-Employed”), there are some things you can do to try and establish credit for your small business.
Pay your bills early. This is a double benefit, since many manufacturers and suppliers offer discounts for paying in cash or for paying early. Wherever you can, take advantage of these deals, which will not only save you a few percentage points off your purchase, but it will help build your credit with that supplier quickly.
Pay your liabilities before they mature. Many reporting agencies boost the credit scores of businesses who pay off their liabilities before they mature, according to the YFS article. This is a quick and easy way for businesses to boost their credit without creating new lines of credit or increasing their total liabilities.
Convert COD to business on credit. Once you’ve established a bit of credit, consider converting current cash on delivery transactions to business on credit, which can have a number of benefits for the small business. It helps free up cash and keeps your company more liquid so you are prepared to take advantage of investment opportunities. It’s critical, however, that you pay your bills on-time, or you’ll be accomplishing the precise opposite of what you’re setting out to do.
It’s important that you open both business credit cards and bank accounts for your business and pay your bills out of these accounts. (Many small business owners find it tempting to use personal cards and accounts.) This will help you to establish your company’s credit sooner.
While it may be tempting to tie your personal credit to your business credit, it’s not necessarily a good idea. Keeping them separate will allow you to minimize the negative cross-over events that could occur if your credit takes a dip in one area or another. Financial missteps that affect your personal credit history and score shouldn’t be able to affect your small business credit, and vice-versa.
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Edited by Amanda Ciccatelli
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