5 Ways to Build Business Credit When You're Self-Employed
It's hard to beat the freedoms of being self-employed. But with the joys of being your own boss and creating your own schedule come some trade-offs. One trade-off can be unsteady income.
Even if you are very careful about your finances, it's possible that a great business opportunity will present itself that you simply don't have the cash for. If you've built good business credit and have access to a business credit card or line of credit, it will be easier to jump on those opportunities.
Building good business credit can seem like a mysterious process if you've never done it before. Here's how to get started. (See also: Best Credit Cards for Small Businesses)
1. Establish strong personal credit first
The vast majority of small business credit cards require you to personally guarantee the charges you make — even if the card is issued in your business's name. That means if the business fails, you will still be responsible for the debt.
Because you ultimately will be the one who pays the balance, expect lenders to pay attention to your personal credit when you seek business credit. Under the Fair Credit Reporting Act, when you apply for business credit, a lender has the right to look at your personal credit profile to evaluate whether to issue it to you.
To make sure you have a full array of options when it comes to business credit cards, make sure you are paying your personal cards on time and not maxing them out. A high credit utilization ratio — that is, using a large percentage of the credit available to you — can cause your credit score to drop. (See also: 5 Ways to Improve Your Credit Score Fast)
2. Run your business like a business
If you want to get business credit in the future, keep good financial records by using accounting software such as FreshBooks, QuickBooks or Xero. Using software designed for this is much easier than using spreadsheets and reduces the chance that you'll make mistakes.
Many accounting software programs have a "reports" function that allows you to create a profit and loss (P&L) statement with the click of a button. A P&L statement shows all of your sales and expenses for a set period, such as a year. To get a business line of credit with your bank, you will very likely have to produce one of these statements, so this feature is a huge timesaver. (See also: 5 Free Accounting Tools for Freelancers)
3. Keep your business finances separate
Before you try to open a line of credit with your bank or apply for business credit cards, open a business checking account. This will show lenders you are serious about running your business.
Maintaining a business checking account also gives you an opportunity to develop a relationship with your banker. If money is flowing into your account regularly, you are maintaining more than the minimum balance, and you are handling the account responsibly (i.e., the checks you write are clearing), chances are that your banker will begin to offer you products such as a business credit card and possibly a line of credit.
Don't use your business checking account to pay your personal bills. You need to establish separation between your business and personal finances and keep accurate records.
To open a business checking account, you will generally need a federal Employer Identification Number (EIN). You can apply for one online through the IRS.
4. Use your business credit card strategically
If you don't have strong personal credit, you may still be able to get a business credit card. There are some higher-interest cards designed for people with a "fair" credit score.
While paying higher interest isn't ideal, if you use the card responsibly, you'll be able to improve your credit profile and should qualify for better deals in the future.
Once you get a business credit card, use it regularly to make business purchases and pay the bill on time — ideally in full — to build a history of using it responsibly. Don't use the card for personal spending. If you connect this card to your accounting software, it will be easy to enter your business expenses, saving you a lot of time.
5. Monitor your business credit report
How do you know if you are actually building good business credit once you make these efforts? Use the free searches on Experian, Equifax, or D&B to see if your business's credit is being tracked. (You will have to pay to get the actual report).
There's a different system for business credit card scores than for personal ones. Business credit scores go from 0 or 1 to 100. Each of the major credit bureaus uses its own formula, but factors such as how long you've been in business, your credit utilization, and the lines of credit you have opened in the last six months are likely to affect your score.
If you find your business isn't on the radar screen of the major credit bureaus and you have already gotten your EIN, try applying for a free D-U-N-S number with Dun & Bradstreet, which should get the ball rolling.
All of these steps take some work and can't be done overnight, so start early — ideally a few months before you think you'll need business credit. It'll pay off. Having strong business credit is a valuable asset that you'll greatly appreciate if you ever get into a cash crunch.
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