How to Separate Business Credit and Personal credit

Research from the Federal Reserve Bank of New York shows that more than half of small business owners who apply for a loan, fail to secure them. One of the primary reasons cited is that the businesses that apply for these loans have poor business and personal credit scores. As a business owner, you should know that keeping your business credit and personal credit and all financial information separate and well organized is essential for the success of the business. One reason for this is that your personal assets and wealth will always be protected, and also, it streamlines the process of qualifying for business loans and other lines of business credit

If you have tried keeping both the business credit and personal credit separate, I am quite sure that you can attest to the fact that it is not easy, but in this guide, I am going to show you how to not only separate your business credit from personal credit but also how to build business credit. 

Separating Business and Personal Finances To Build Business Credit

This is a multi-step process that most first-time business owners are quite unfamiliar with. In order to streamline this process for you, Equity Movement Entreprises in collaboration with Women Inflection Point has created a step-by-step process with clear instructions on how to achieve this objective. It doesn’t matter what kind of business you are in. there are the tried and proven steps to take to eventually build business credit from the ground up. 

Get an Employer Identification Number

The Employer Identification Number better known as EIN is a nine-digit number that gets assigned to your company by the IRS. it is the number that you will use when filing your business’s income tax return or a payroll tax return. It is also the number that will help establish your business entity type, as well as help you open a business bank account, apply for a business credit card and do a lot more. You can think of the EIN as a business version of your Social Security Number. Once you have your EIN, you won’t have to use your SSN for business purposes. This basically helps establish the very first line between your business and personal finances. 

Make Sure You Establish Your Business As A Separate Entity

As long as you have not established your business as a separate entity, any transaction you make will be attached to you and your personal assets. Any loans you take, you will be personally liable for them. As such, to avoid this,  make sure sure that your business is established as an LLC, a sole proprietorship, or an S-Corp. You can talk to your tax or financial planner who will help you explain what these forms of business are and which one would be most appropriate for you. This is among the very first fundamental steps that you must take in order to build business credit for your business fast.

It Is Time To Open Your Business Bank Account

Now that you have an EIN and already established your business as a separate legal entity, the next step naturally is to open a business bank account. This decision is entirely up to you whether you want the account to be a business checking account or a savings account. To be on the safe side, it is important that you start off with a business checking account. You need to show activity in your finances to build business credit and a business checking account is the cornerstone of your company financial foundation. Use the business checking account to pay the company’s bills, deposit cash, collect and make invoices, buy equipment using the account. Basically, to build business credit, there needs to be activity in terms of financial operations. Be cautious and try to avoid cash-only operations, or having to pull cash from your personal bank account. 

Start building your Business Credit History

The first step you do is by taking on a new business credit card and make sure that you always pay on time. Positive payments that you make will reflect on the credit file that has been set up for your company. The main advantage of a business credit card over personal credit cards is that you may be able to deduct interest from business credit cards. It is important that you ensure that when applying for a business card, the provider reports to the business credit bureaus and not to personal credit bureaus. 

A major mistake that most new business owners make is relying on personal credit cards to finance business operations. This establishes liability, and in the process, you might damage your personal credit. Once you have a business credit card, try also getting credit lines with your vendors and suppliers, also known as trade credit. In addition to that and depending on the industry you are in, you may try getting new accounts with other businesses like Office Depot, Staples UPS, etc, and any other company willing to establish a small credit line for your business without reporting or even checking your personal credit information. Just like personal credit, make sure that you are paying all your bills on time or even early payments, this goes too for the suppliers and overall, this good behavior will build business credit very fast. 

Be Deliberate On Monitoring Your Business Credit Regularly

Perfect. Your business is running smoothly and to this point, there is a clear and well-defined line between your personal credit and business credit. If you have followed all these steps to this point, congratulations, you have made it! But, we are not there yet. After you have established healthy business credit, the next thing you have to make sure you are doing is staying on top of it. Small Business Administration reports that the business credit score of 33 percent of small businesses may decline over just a period of 3 months. This is the primary reason why lenders and creditors consistently reassess your company’s creditworthiness. Note, if your business credit score falls, terms will be readjusted or even stopped altogether and without notice, you may be asked to start paying cash on delivery for supplies. To avoid these surprises, make sure to regularly monitor your business credit. It is a habit that will help build business credit really fast. 

Bottom Line

Starting out as a small business owner is not easy and most of the times you will like the odds are stacked up against you. However, the key is being consistent with every effort to build up your business credit score. Be extremely deliberate with your actions in regards to your business and taking these few and proven steps will help you access more financing from better sources at better rates.