bad personal credit

Poor credit is the main reason why loan applications for well over 50 percent of small businesses and start-ups are rejected, according to the Federal Reserve Bank of New York. 

Due to a range of personal financial factors, such as college debt, divorce or bankruptcy, many business owners (or people who want to start businesses) do not have good personal credit. The good news is that, in order to build good business credit, you do not have to wait until your personal financial situation is in solid form.

While large banks look at your personal credit score, alternative lenders like factoring companies consider more than just your credit score. It is possible to have poor personal credit and still improve your business credit. Here are four tips to help you get started:

1. Differentiate your personal credit from your business credit

If your personal credit score is damaged, consider getting a separate tax ID number for your business. You don’t necessarily have to incorporate your business. You can still get a tax ID number from the IRS if your business is a sole proprietorship, an LLC or a partnership. Talk to your CPA for information on the different options for your business and select the one that is right for you.

In addition to getting a tax ID number, it’s a good idea to set up your business to be distinct from your personal profile. This step involves acquiring a separate business address (not a post office box), a business bank account, an official corporate name registered with local authorities and a separate telephone number.

Your business credit score is linked to the tax ID for your business, not your Social Security number. This important difference can help you build positive business credit history and start your business off on a more positive path.

Besides the additional capital you can borrow, there are other reasons why you should keep your personal credit profile separate from your business credit profile:

  • With a business lender, such as a bank, you’re contractually obligated to pay the loan back, whether through collateral or company profits. If you don’t separate the two and your business collapses, your personal savings and personal assets could be at risk.
  • Having separate business credit safeguards your personal credit score. Business owners who rely solely on personal credit cards to fund their operations often end up maxing-out their credit lines, risking damage to their personal credit.

2. Build your business’s credit score

Once you have a tax ID number and a legal identity for your business, you can start building your business’s credit history and qualifying for trade and credit lines from suppliers and funding sources.

Start by opening a business credit card and always pay it off on time. When applying for a business card, just be sure to verify that the card provider reports to business credit bureaus and not to personal ones. The business credit bureaus will add your payment history to the credit file associated with your company name. Unlike personal cards, you may be able to deduct interest from business credit cards.

For your vendors and suppliers, you should open credit lines and make payments on time, so you can start reporting your positive payment activity to commercial bureaus. This is known as trade credit. It typically allows you net 15, 30, or 60 days to pay for your supplies and services. These suppliers will automatically report your activity to bureaus and establish a credit report for your business.

As you establish a consistent history of on-time or early payments with these suppliers, your business credit scores will increase. If you are able to stay on track with your payments, you can establish a strong credit rating for your business.

3. Monitor your business credit regularly

Credit is something you’ve got to stay on top of, but the payoffs can be huge in the long run. After establishing strong business credit, you’ll want to maintain your record by checking it regularly. Because credit scores could change in just a short time span (several months), lenders and creditors reassess your company’s creditworthiness on an ongoing basis. If your credit decreases, credit terms can be adjusted, stopped altogether, and you could be forced to pay cash on delivery for your supplies.

4. Choose Invoice Factoring

Invoice factoring offers an innovative way to turn your invoices into immediate cash. When you factor your invoices, you receive an advance on the customer invoice, so you don’t have to wait weeks and months for payment or risk incurring debt. Factoring is not a loan, so your credit score is not the most important thing considered. With the cash flow that factoring brings, you can continue to pay your suppliers on time, which reflects positively on your credit report.

Building a strong business credit profile separate from your personal credit is an easy way to give you the edge. By following a few simple steps, you’ll be on your way to establishing a strong business credit score, enabling you to access better financing options and rates

Do you feel that your personal credit or business credit scores are holding you back? With help from a reputable factoring company, you could have the money you need to finance your business. Get in touch with us right away for a factoring rate quote.

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