8 Steps to Establish Small Business Credit

Establishing business credit is an important step for any new small business and helps you to: (1) maintain a credit history separate from your personal credit history and experience the business benefits of having good business credit, and (2) demonstrate separation between owners and the business.

Why separate credit histories?

By having a business credit history separate from your personal one, you can minimize the effect negative events on one might have on the other. For example, if you have some financial missteps that impact your personal credit history and score, they shouldn’t impact your small business credit if you have established a clear separation and vice versa.

Why separate business and owners?

Unless you’re operating your small business as a sole proprietorship or general partnership, you need to demonstrate that the business is separate from the owners. One of the key benefits that corporations and limited liability companies (LLCs) provide the owners is protection of their personal assets. Keep this protection in place by consistently showing clear separation between the owners and the business.

Eight steps to establishing your business credit

1. Incorporate your business. Even though you may be incorporated when you’re reading this, it deserves a mention. With sole proprietorships and general partnerships, the business is legally the same as the owner; therefore, there can be no separation of business credit history from personal. Incorporating a business or forming an LLC creates a business that is legally separate from the owner(s).
2. Obtain a federal tax identification number (EIN). The EIN is basically a social security number for a business. It is required on federal tax filings, and is also required to open a business bank account in the name of the corporation or LLC. In order to comply with IRS requirements, many larger businesses also require an EIN from their vendors in order to pay them for services provided.
3. Open a business bank account. Open a business checking account in the legal business name. Once open, be sure to pay the financial transactions of the business from that account. If you use a business credit card (see below) for many financial transactions, be sure to pay the credit card bill from your business checking account.
4. Establish a business phone number. Whether you use a landline, cell phone or you use VoIP, have a separate number for your business and in your business’s legal name. List that number in the directory so it can be found.
5. Open a business credit file. Open a business credit file with all three business reporting agencies: Experian, Equifax and TransUnion.
6. Obtain business credit card(s). Obtain at least one business credit card that is not linked to you or any other owners personally. Pick a business credit card from a company that reports to the credit reporting agencies.
7. Establish a line of credit with vendors or suppliers. Work with at least five vendors and/or suppliers to create credit for your company to use when purchasing with them. Ask them to report your payment history to the credit reporting agencies.
8. Pay your bills on time. Perhaps it should go unsaid, but be sure to pay your bills on time. Like with your personal credit, late payments will negatively impact your business credit.

Benefits of having good business credit

Having good business credit can provide a number of benefits, including:

• Positioning your company for more favorable payment terms with new vendors and suppliers.
• Reducing the number of times you will need to prepay for products or services purchased.
• Allowing you to obtain better interest rates and credit terms from lenders and banks.

Once you have established and built good business credit, be sure to monitor and protect it, just as you do with your personal credit.

Optimizing Your Credit To Buy and Invest In Real Estate

What is the best strategy for optimizing your credit to buy a home or scale investments to the size you desire?

Credit, in particular low credit scores, continues to be one of the most significant factors holding back U.S. home buyers and real estate investors. While mortgage lenders have tightened up, data suggests American credit scores may have slipped further than many realize. Southern states appear to suffer from notably lower average Experian credit scores. Tracking of FICO credit scores by Money-Zine also shows that there is a substantial difference between median and average scores. By one metric, the average U.S. FICO score was reportedly 720 as of the fourth quarter of 2014. The other metric shows an average of just 640. Under this measurement. Californians had some of the best credit scores with an average of 652. Connecticut came in slightly higher at 653. On the other end of the scale was Mississippi. with an average of just 615. This means that very few Americans have many home loan choices. This doesn’t even take into account other mortgage lender requirements of credit history, employment, income, assets, and the transaction itself.

So how can those with less than great credit scores fix their credit to buy homes and invest in real estate?

Credit Score Requirements & Your Mortgage Loan Options

The average FICO score may leave borrowers with few conventional home loans to choose from. However, there are loans for those without good credit, and even financing options that don’t require credit history. This might include FHA loans, VA loans, USDA loans and foreign national loans. Real estate investors even have the option of a hard money loan. Private money lenders are always willing to consider a potential borrower.

Over time, it is anticipated that mortgage credit will become even more accessible. Those that wait until they are out of debt, or hope that time alone will improve their credit, will find that time also means higher property prices, higher interest rates, and more competition. That said; most will see waiting as counterproductive.

The Dos & Don’ts of Fixing Your Credit

Do Fix Your Credit ASAP

Bruised credit isn’t anything to be embarrassed about. But neglecting to take action to fix it now might be. Every day with poor credit is extremely expensive. Those that want the best possible financial future, want a way to get ahead, and who want to give all they can to those they love will find improving their credit incredibly empowering. It can take years off of achieving goals and financial freedom. Even if you can only make baby steps in fixing your credit now, take them. Even if you can buy a home and invest in real estate on a large scale without using your personal credit now, don’t neglect to try and fix your credit.

Do Find Help

Just as with stopping foreclosure or investing in real estate, there is help available for those wanting to fix their credit. Credit tracking and simulation software can help individuals tackle their credit challenges. While it can be difficult to find people and organizations to trust, there are attorneys and credit repair specialists that can help in your efforts. In many cases, speaking with a mortgage broker or loan officer can put many on the fast track to better credit, financing and property ownership. A good loan officer can let you know what needs to be fixed to qualify for financing (and not), and can often facilitate rapid rescoring to land approvals sooner.

Don’t Rush

Don’t rush into expensive and potentially catastrophic ‘solutions.’ Bankruptcy may be necessary, or even the best strategy for some. It also comes with harsh and long-term financial consequences. Many don’t realize that debt consolidation programs can also have similar impacts on credit and can be viewed the same by creditors. It’s also important not to rush to pay off old debt that may no longer actually be impacting your credit score. Some may do it out of a feeling of moral obligation once they are back on their feet and are making money through real estate, but paying these old debts first may not provide the best return on the dollar.

5 Tips for Preserving Your Credit

Once you’ve got your credit fixed, it’s important to preserve it. Some principles and strategies for accomplishing this might include:

1. Building business credit for investing in real estate
2. Keeping investment and personal debt and credit separate
3. Not using credit cards as a habit, unless it is sure they can be paid off in the short term
4. Avoiding daily personal credit usage, unless it comes with perks and cash-back rewards
5. Know when to bite the bullet on small disputes and pay them off before impacting your credit, even if you don’t think you should owe