Establishing Corporate Credit for your company is a crucial step in its development. Building a Corporate Credit profile is very different from your personal, or “Consumer Credit” because it is based on credit granted directly to your company by financial institutions and vendors, and not based or guaranteed in any way on your personal credit. The various reporting agencies use differing methods to measure your company’s “credit worthiness” but they all essentially report on the two basic premises: How timely has your company paid its debts in the past? Is your company financially sound enough to repay its debts? It is essential to establish a Business Credit Profile so that you can secure operating lines of credit and other types of loans from financial institutions. These institutions prefer to work with companies that have a proven track record of payment, and the ability to repay future debts. This also holds true for potential vendors and suppliers: the vast majority will examine your company’s credit before extending credit to you. Acquiring or leasing property for your business is another area where it is vitally important to build a business credit profile: Having an established corporation or company credit profile on good terms can lead to favorable terms and rates, which could mean lower interest rates and money saved!
Build Business Credit – Benefits of Separate Credit
Some of the benefits of establishing a corporate credit profile for your business include the ability to establish credit-based relationships with vendors or suppliers, readily acquire real estate loans, obtain automobile loans or leases, and establish operating lines of credit from banks that are not based on your personal credit or guaranteed, personally. As stated above, these debts and liabilities are acquired by the corporation or business proper – an entity that is legally separate from its owner(s). This can be especially beneficial if you have a less than pristine credit history as there is no personal credit check. Once corporate credit is established and maintained, the loans or extension of credit is based on the merits of the corporation’s credit profile, with no personal guarantees necessary. So long as the assets purchased fall within the proper guidelines, and careful steps are taken to ensure that they are acquired and used in the proper manner, then the acquisition of such assets is well within the reach of a corporation with a good credit standing.
Separate Entities and Managing Risk
Another reason to establish a Business Credit profile is that it provides for a separation of funds and assets from your person, and is in keeping with maintaining the corporate form. This separation is essential for a few reasons. First and foremost, it helps to limit your personal liability by ensuring that no company funds (nor debts) are co-mingled with personal funds. If the company and corporate credit profile is managed properly, it is very difficult for creditors to “pierce the corporate veil” when it comes to pursuing the company for outstanding debts. You will have maintained the integrity of your corporation’s separate legal entity status, and will have limited substantially any direct, personal liability. This has a massive impact on personal assets as they are effectively shielded because the debts and liabilities were incurred by the corporation, not an individual. The very tenet of establishing a corporation is to separate the owner(s) from risk and mitigating liability. Using your own credit profile will negate the legal separate entity status of your corporation, thereby opening you up personally against any lawsuits aimed at your company. Much like the co-mingling of funds, using your personal credit profile or personal assets to guarantee loans will make you fair game for potential collections or liability suits from banks and various other creditors. This also holds true for tax or regulatory agencies; any type of personal loan guarantees by the owner of a corporation for corporate debt or credit will be seen as an abandonment of the corporate form – this can have serious tax implications that can directly impact your wallet.
Building Corporate Credit
Business credit can take many forms, and deciding which form of corporate credit works best for your company is critical to the successful utilization of that credit, and the continued positive growth of your company’s credit profile.
Initially, most small business owners will use their personal credit, or other informal sources (such as borrowing from friends or relative), or begin operations by acquiring a small business or micro loans from the government (SBA). While these may be the only sources of capital or operating funds early in the formation of your business, sourcing more traditional credit and loans from banks and other firms (including vendors and suppliers) on a business or corporate level will be essential to the operation and growth of your venture. This will be critical from both financial and liability perspectives.
There are some simple, basic steps you can take to ensure that your credit performance is being reported to the various reporting agencies. Some of the basic steps are:
- Ensuring that your vendors report to any of the Business Credit Reporting Agencies.
- Make sure payments are made per the terms agreed upon by your creditors or suppliers.
- Keep accurate books and follow the proper accounting principles for your type of business.
Once you establish business credit in any fashion, the business or corporation is given a “grade” or rating by the various rating agencies (Dun & Bradstreet, Experian Business, Standard & Poors, BusinessCreditUsa, FDInsight, etc.) and this rating is used in turn by the various banks, vendors, or investors in order to determine the level of risk involved in granting corporate credit or investing in the business in question. These ratings are looked at by themselves, or in the cumulative (where the credit worthiness, length of time in existence, debts, profit, etc. are factored in) by potential creditors, vendors or investors when deciding whether or not to grant credit to, or invest in, the company. For more information on how to build business credit and Corporate Credit Scores please see the details provided for each credit reporting agency.
Unless a knowledgeable professional assists with building this corporate credit, it is usually very difficult for a start-up business or new corporation to be granted credit on its own merits. The necessary loans and lines of credit would generally need to at first be guaranteed by the business owner, with his/her personal credit profile and rating used to determine the amount of credit available. It can then take years of successful transactions and reporting to the various corporate credit reporting agencies for a business or corporation to grow it’s credit and benefit from the various business loans and operating lines of credit available at favorable rates (without needing the personal profiles of the owners). Companies Incorporated offers vital, professional assistance with the establishment of a corporate credit profile, and we can dramatically shorten the amount of time necessary to establish an excellent credit profile. We offer proven results– You can establish true business credit, quickly and easily. Call now!
Call our specialists to learn more about how our credit programs, with satisfaction guarantees, can help you! 800.830.1055 Toll Free or 661.253.3303 International.