This is an article written by one of our attorneys, Marco Sanchez:
As an attorney, I have taught hundreds of seminars throughout the United States on the topics of business structuring and asset protection. I teach about the importance of separating your personal liabilities from those of your business activities. I structure clients by separating their business assets from their personal assets to avoid comingling. This is merely the foundation for creating a successful business structure.
I get many questions as to what is the next step is after laying the foundation. How does my business get funding? How can it purchase goods and services? Do I just get a credit card in my name and just invoice the business or can the business get credit? I generally respond by asking them if the business is compliant with the federal, state and local governing authorities and whether is it is keeping a paper trail of its decisions and financial activities. If it is, then the need to start establishing business credit is paramount.
For example, assume that Susan and John have been operating a flower business for five years and are making a small profit from it. They come to me to make sure that they are protected from the liabilities of business, but also to make sure that the business is protected from their personal liabilities. I ask them about the credit health of the business. They state that they have credit cards in the business’s name and pay them off on time. They also state that they have tried to get a business loan, but they did not qualify because of their personal credit.
Many business owners fail to recognize that merely obtaining a credit card in the business name does notbuild business credit. It must report the activity to one of the business credit bureaus such as Dun & Bradstreet or Experian for Business. Susan and John did not realize that they were using a credit card that was not reporting the business credit activity to the appropriate business credit agencies. They were also using their personal social security number on the credit applications. Thus, there were many inquiries into their personal credit history.
As we all know, the more inquiries into your personal credit, the lower the score you get personally. What if John and Susan want to buy a new home? Do these inquiries affect their interest rate? Do the lenders look at the debt to income ratio even though some debt is for business purposes?
Business owners should never comingle their business activities with their personal. The same holds true when dealing with business credit. Business financial activities should be transacted through the Employer Identification Number (EIN), not the owners’ social security numbers. Most owners are not aware of the power of obtaining business credit. Business credit has 10-50 times greater credit capacity then personal credit. The most attractive aspect of business credit is that once obtained, it does not affect the owners’ personal credit score and vice versa.
Business owners need to be proactive in establishing trade lines, business credit cards, and a payment history; but most importantly, they need to ensure that these activities are being reported on the businesses’ credit profile and not their own.
Once the business establishes its own trade lines, credit cards and other reportable lending activities, it will qualify on its own for credit. The best part of this scenario is that the business credit activities will have no impact on the personal credit of the owners.
What should Susan and John do to correct their misunderstanding of business credit? I recommend that they seek the guidance of professionals who deal with business credit. Professionals who are aware that business credit is a moving target and will act in the best interest of the owner to insure that they are fulfilling all the requirements that any lender will ask of them. They should meet with a professional, such as myself, that know that even though there are over 500,000 lenders out there, only about 6000 report to the business credit agencies. Who are those lenders? That is exactly why you need a professional. The numbers change constantly, so you need someone to guide your business through the process of establishing a business credit profile and choosing the best lenders with whom to do business.
