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Expert Answers to Biz Questions

Listen in! Pick up some expert advice to a reader's question that we selected from CyberSchmooz.

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Building Credit as a New Business

 

Many small businesses rely heavily on their personal credit scores to obtain financing as they are getting started. If you decide to personally guarantee a business loan, there is a possibility it could affect your personal credit score. Typically, though, loans obtained for business purposes don’t appear on your consumer credit report.

 

Ways Business Debt May Affect Personal Credit

Although it is fairly rare that taking out a business loan will affect your personal credit score, there are a few notable ways that it can. If you default on a business loan backed by a personal guarantee, the lender oftentimes will report the default on your personal report. This includes business credit cards. Even if you pay your bills on time, business debt can ultimately result in a lower credit score if reported.

 

If you decide to use personal credit cards to fund your business, naturally, those debts and payment histories will impact your scores. In this scenario, the impact may be good or bad depending on the information reported. Tapping a home equity line of credit to help fund your business is another way your business finances could have a positive or negative effect on your personal credit.

 

Set Up a Separate Business

Running a business comes with its own set of risks. Establishing your company as a sole proprietorship is one of the easiest ways to organize your business in terms of paperwork. Unfortunately, it also leaves your personal assets unprotected if your business were to get sued. If you set up an S Corporation or an LLC, your business assets are separate from your personal assets. If your company is sued, your personal liability is limited. This legal distinction offers a lot of protection to you personally and is worth the extra effort and expense.

 

It is especially important to draw a clear line between you and your business. Even if you have an LLC or S Corporation, if the court cannot see a clear distinction between your business and your personal finances, they may find you personally liable for your business’s debts. This is called piercing the corporate veil. Avoid commingling expenses. Try to operate your business as a true corporation by keeping records and following guidelines set by the IRS.

 

Keeping Track of Your Taxes

Taxes are much easier if your business and personal finances are distinct. This is especially true in the case of an audit. The best way to accomplish this is to open a separate business bank account. If you decide to use credit cards for your company, use the name of your business. Be scrupulous. Business accounts are for business. Personal accounts are for personal expenses. Don’t blur the line between the two. Put all of your earnings in your business account and then transfer any money you need to your personal account. This establishes a “paper” trail. It may seem strange and inefficient, but it is a good habit to get into. When it comes time to do your taxes, there won’t be any guesswork involved. And, you definitely don’t want to make the IRS guess.

Building Your Business Credit

Establishing business credit is an important step for new small businesses. It helps you maintain a credit history distinct from your personal credit history. You can also reap the benefits of developing a strong business credit score. Building your business credit also helps further demonstrate the distance between personal and business matters. Setting up a separate business and keeping your business and personal expenses and finances separate are both great ways to start building your business credit.

 

After incorporating, obtain a federal tax identification number (EIN). It is basically a social security number for your business. It is required to file taxes and open a business bank account. Some vendors may also require that you provide an EIN.

 

Now that you have an EIN, open a bank account in your business name. Use this account for all financial transaction. This includes paying your business credit card balances. Have a separate phone line for your business. Make sure this is listed in directories.

 

Credit bureaus are different for businesses. There are three main agencies: Experian, TransUnion, and Equifax. Make sure to open a business credit file with all of these organizations. It is a good idea to obtain at least one business credit card. You want to choose a card that reports to one of business credit reporting agencies. Use the card wisely. It can have a positive or negative effect on your score depending on how you use it. Always make payments on time.

 

Benefits of a Good Business Credit Score

There are a number of benefits of having business credit. Resist the urge to pay for your new business from your personal account. If you work to maintain a good credit score, banks may be willing to give you the money you need to expand your business and purchase equipment. A business credit score allows banks to determine how much your business can afford. This amount is usually higher than trying to get a loan as an individual.

 

Many times, business credit cards offer benefits like airline miles, cash back on purchases, and other rewards. Some banks even offer an extended warranty on equipment that you purchase using a business credit card. Sometimes business credit cards actually offer a lower interest rate. Some even offer zero percent interest for a certain period of time. If you have a credit score that is lacking, consider hiring a company like Lexington Law to help you clean up your score and get back on track.

 

“If you need to fix your credit score or other issues with your credit history, now—2018— is definitely the time to explore professional credit repair services and actively begin working toward managing your money more effectively in the new year,” state Lexington Law experts. “By doing so, you’ll be in the best position to take the most advantage of what looks to be a stellar year for American economic expansion in 2018.”

 

 

Revolving Line of Credit

For short-term funding, you should consider looking into a revolving line of credit. Basically, it is when a bank or merchant provide a specified amount of credit that is always available for an undetermined period of time. As debt is borrowed and then repaid, it can be borrowed on again. Like other credit, interest accumulated and is capitalized, but there is no set monthly payment.

Building your credit and keeping your finances separate is a sometimes challenging but important aspect of starting a new business. Maintaining distinct finances may save you a lot of headache in the long run and helps you establish and build your business credit score.

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