Award-winning tax accounting firm EA, MST and CEO Karla Dennis, Kara Dennis and United—Professional in tax planning.
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Picture this common scenario: A business owner starts their company, works hard, and suddenly realizes they need capital to take their company to the next level. Then, when that same new business owner tries to get that funding, they’re told, “Oh, well, you need a personal guarantee,” which means they need to factor personal credit into the equation. If they have personal credit, they may not even need to create this link, but creditors will demand it anyway, and business owners find themselves back at square one.
What’s next?
Create a credit file
First, it’s important to understand that building business credit is different than building personal credit. Business owners need to build a credit profile for their business. Build a credit profile by making sure your business has an Employer Identification Number (EIN) and a Dun & Bradstreet account.
A Dun & Bradstreet account is a way for business owners to register a business and link their credit profile to a “Dun number”. This is similar to how a personal credit file is associated with an individual’s social security number. When business owners create a lite profile, they build the profile by providing financial information about their business. This information includes items such as income statements and balance sheets, both of which require some level of proper accounting.
Consider income and assets
Essentially, business owners need to know how much they are earning, and if they don’t know the exact amount, they can “predict”. If a business owner calculates their sales trajectory to be $100,000, they need to forecast it on the income statement before forecasting expenses. This brings in a net profit. An example would be a table that lists income and then expenses such as phone bills, marketing, utilities, rent, and others.
With regard to the balance sheet, business owners should consider what assets they own. You may have a cell phone, a computer, and any number of other work-related equipment and materials. These items are examples of company assets that provide some tangibility to the business. Additionally, business owners creating a profile with real or projected financials on Dun & Bradstreet is a real key point for a business to get the funding it needs.
trade line
Next, business owners need to obtain credit in the name of their business, which they can do through a trade line. Trade lines can be as basic as getting a credit card at a local office supply supplier like Office Depot or Office Max. It should be their business credit card, in their business name, like the Amazon credit card. The amount doesn’t matter, it could be $1,000 or $500, it should be based on the business’ ability to continue financially paying off on time. Regardless of the amount, once issued, this line of credit is the first line of credit for your business and EIN. This is important for the Dun file because businesses must list their creditors. Being able to list creditors like Office Depot or Amazon, or even other vendors that you use and pay for over time, enables you to add more information to your overall profile.
Businesses can also ask suppliers, such as their accountants, to send them a letter stating that they are customers and that they will pay on time, similar to a letter of reference for a letter of credit. Starting a business may require some thinking outside the box. Remember, paying suppliers on time is very important; this is very important because business owners now expect those suppliers to provide that reference. The more business owners can invest in their Dun & Bradstreet profile, the more it will be updated and the more their credit profile will grow.
Part of the reason you start a business is to keep your business assets separate from your personal assets. The only way to do this is to exclude yourself, and building a business and matching credit profiles is the way to start.
While not immediate, taking these steps will help lay a solid foundation and help your business scale to the next level. After you create a credit file for your business, you’ll need to get a line of credit or apply to the Small Business Administration (SBA), which provides small loans to small businesses just starting out, and they’ll usually ask for a Dun number as part of the application.
Plus, business owners can even get funding through lenders like American Express partner Kabbage. You don’t always need to find a big bank, you can usually find a lender that specializes in small business loans.
Here’s the thing, entrepreneurs and business owners, building business credit and creating dun numbers is critical. It puts the business on track to get more money to grow the business, hire more staff, do more marketing, etc. Because at the end of the day, as a business owner, it’s all about continuing to grow and pocket the profits. In order to do this, you need to have some extra funds on hand from time to time.
The information presented here is not investment, tax or financial advice. You should consult a licensed professional for advice regarding your specific situation.
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