Did you know that most small business owners who apply for loans are turned down? Don’t take my word for it, this gem comes from the Federal Reserve Bank of New York. According to the report, reasons for the high rejection rates include impaired personal or business credit and a mismatch between borrowers and lenders. The first reason is quite alarming. It turns out that most people understand personal credit and how to use it. But when it comes to business credit, there is a lot of misunderstanding.
When business owners don’t understand how to build their business credit, they don’t qualify for banks leaves leaving many believe their only option is to get loans from friends and family. However, this does not help solve the broader issue which is how to keep your business credit separate from personal credit.
Why is separating your personal and business credit necessary? The first reason is that businesses tend to be heavy users of credit; on average 10 times, more than a consumer. This brings us to the second reason; heavy credit usage can sink your personal credit. Beyond these two reasons, separating personal and business accounts is an imperative for tax purposes.
So how can you get started? The first step is to register your business as a separate entity. This could be as a sole proprietor (though not recommended), an LLC, or a corporation. Registering a business is not that difficult these days. While you can ask an attorney or an accountant to help you, you can also go online and do it yourself. In most states, you can set up a new company in less than a week. Just don’t forget to get an Employer Identification Number (EIN) from the IRS when everything is complete.
Now that you have your business registered, you want to set up a bank account for your business. This will be the main bank account you will use for all the funds flowing through your business. The process is simple and some bank might allow you to open a new bank account online.
One question which usually comes up when a business owner finally sets up their business banking account is how do they pay themselves. To do so, you will want to write a check to yourself and then deposit that check into your personal account. This will keep your business and personal expenses separate by showing a clear trail of payments from the business. In addition, this will help when you apply for loans for your business as lenders will want to see your bank statements.
So, you have a company and a business banking account, but how does this help you separate your business credit and your personal credit? To do so, you will want to get a credit card for your business and make sure that you always pay on time. As an FYI, you can also deduct the interest payable from your business credit cards, this will help to reduce your corporate tax load and is just an added benefit of separating your business credit from your personal credit.
Another benefit is that a business credit card will help to move charges from your personal credit accounts. This will reduce personal credit usage and will make it easier for you and your family to do the things you want to do in the future. For example, if you have an excellent credit score (say an 800 score) but you have maxed out your credit cards, your score could fall by 100 points or more. When this happens, you will fall into credit purgatory as most lenders will be scared off when you apply for new credit cards, loans, or lines.
If you don’t have great personal credit and are not sure where to begin, there are several retailers who offer small credit lines for businesses without pulling a credit report. This includes retailers such as Home Depot, UPS, and Staples to name a few. If you are not sure whether a retailer you have in mind has such a program, the best option to contact their credit division to learn more about the process. This can be a big plus for your business
Registering your business, setting up a bank account, and getting a business credit line not only helps you protect your personal credit, but it sets your business on the right path to getting the loans you need to grow. So, don’t delay, get started today.