Having excellent business credit allows a business to assume responsibility for its own debts, shielding its owners from personal liability. To small-business owners accustomed to operating as sole proprietorships, the “corporate veil” may seem like a luxury reserved for big corporations. However, that needn’t be the case. Small-business owners who build their business credit ratings can take advantage of the same protections their larger counterparts enjoy.
The Right Legal Structure
There are certain advantages to operating as a sole proprietorship: it’s inexpensive, uncomplicated, and easy to maintain. But sole proprietorships make business owners fully responsible for all business debts. Because their personal and business finances are so inextricably linked, and because their businesses are not considered separate legal entities, they have no opportunity to build business credit.
Of course, forming a C or S corporation doesn’t make a lot of sense for many small-business organizations, especially those owned and operated by single individuals. But forming a limited liability company offers the same “legal entity” status, and the same capacity to separate personal and business debts. That’s why choosing to form an LLC is so popular among small-business owners.
The Ground Floor of Business Credit
Once a business has a legal structure that will allow it to build credit, a Tax ID, and a D&B D-U-N-S® number, it can begin to establish a business credit rating of its own. This is typically accomplished by applying for trade credit. Trade credit allows businesses to defer payment for purchases of goods or services from specific vendors.
As a business proves its capacity to responsibly manage trade credit by keeping accounts in use and paying them off early, its business credit ratings will rise. Credit-hungry small-business owners can also build credit via equipment leases, secured business credit cards, and alternative lenders.
As a business’s credit rating rises and its history grows, its prospects for qualifying for credit from traditional lenders improve. Small-business owners should consult with their bankers to ascertain how far they are from meeting the bank’s criteria for business loans, lines of credit, and other credit products, and should work toward achieving bankability.
Once a business can qualify for a small, unsecured loan, one should be taken out regardless of the business’s capital needs, and paid off in a prompt manner. Business lines of credit and credit cards should also be used judiciously. In doing so, business owners can prove their business’s credibility, which will almost certainly reap rewards later.
Small Business, Big Protection
Even very small businesses can build solid business credit ratings, if the proper steps are taken. Hopefully, most business owners will not need to take advantage of the liability protection that good business credit provides, but the peace of mind is well worth the effort it takes to build credit.