Okay, you’re thinking about starting your own home-based or other small business. And whether or not you start from the ground up or buy into an already existing business opportunity, licensee opportunity, distributorship or franchise, the issue of how good (or bad) your credit may be is bound to come into play at some point.
What many new entrepreneurs fail to realize is that their personal credit score and their business credit score are two very distinctly different things and yet they are intrinsically linked. How, you ask? Well, it’s a little bit of a chicken and egg proposition. When it comes to borrowing money to start or grow a business, lenders of all sizes and kinds want to see some proof that you’re a good risk. But proving you’re a good risk when you can’t get a business loan to begin with is tricky. For many upstart prospective small business owners, that’s where the personal intersects with the professional in ways that they may not be aware of and have to plan for earlier rather than later.
But before we address that issue more specifically, let’s cover some more basics…
Personal versus Business Credit: Understanding the Difference
The biggest difference between your personal credit and your business credit is the way it is tracked and recognized by lenders. Where your personal credit history is directly linked to your social security number and is measured on a FICO scale of 300 to 850, with a higher score connoting less risk, your business credit score is a whole different animal. It is linked to your EIN (Employer Identification Number), also known as your Federal Tax Identification Number.
Having an EIN will enable you to apply for a D-U-N-S® number. This is the number that connects you to Dun & Bradstreet, the standard bearer when it comes to business credit bureaus. The business credit score attached to your D-U-N-S® number is called your Paydex score. It is based on a scale of 0 to 100, with 80 and above being optimal. This score is more straightforward in many ways than is a personal credit score in that it only looks at two things―whether or not a business pays on time and whether or not it meets its creditors’ terms.
So, does every small business owner need an EIN and everything that goes along with it? The answer is “no.” Sole proprietors and certain other types of business owners do not need an EIN. (For a closer look at who needs an EIN and why, click here on the IRS website.) But those same individuals need to know that the road to borrowing money can be much harder without it.
Moving Your Credit from the Realm of the Personal to the Professional
When it comes to building your credit in the eyes of lenders, personal accountability is the best place to start for sure. Having your own personal checking and savings accounts, with an average positive daily balance that you manage effectively, as well as a strong personal credit card history are both critical if you want to make the leap to establishing strong small business credit.
And while not everyone who is a small business owner will want or even need to make that step, many of them don’t really realize what they are risking by not taking it. The fact is that as small businesses begin to grow and flourish, becoming steadily more complex both legally and financially, separating personal credit from business credit isn’t just convenient, it’s absolutely necessary.
Putting your personal credit history on the line to start your business or even to keep it going actually can be very dangerous. If your business goes under, so will you. And who wants or can afford to lose their house or their car, especially when things on the professional front aren’t going according to plan? Business owners who protect themselves legally and separate their personal lives from their business endeavors on every level and who do it sooner rather than later may save themselves a lot of grief in the long run.
However, simply establishing a business credit report is not enough. In fact, having no activity on a business credit report can actually hurt your score and therefore your chances of getting the financing you need, sometimes even more than not having one at all.
Building a solid credit history for yourself and then your company over time is a big commitment. It means starting early, moving slowly and steadily, and taking concrete steps to get the job done right.
That said, join us tomorrow when we will provide you with some simple steps you can take to do just that.
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