As of 2016, The Small Business Administration found over 28.8 million active small businesses in the United States which, according to FitSmallBusiness.com, accounted for 99.7% of all US businesses. One area where multiple surveys confirm a rise in small business activity is right here in the wedding and events community. This shouldn't be a surprise to us considering that, according to some industry sources, an average army of 13 vendors are hired per wedding! Between the planner, photographer, venue, beauty, attire, flowers, and food, couples need the help of experienced pros to bring their dream event to life. Amen to that!
With limited budgets and low head counts yet bursting with a whole lot of hustle, most wedding vendors fit the small business mold. Without the proverbial ‘pot o’ gold’ or some deep investor pockets to hire your own CFO and accounting staff, one area of small business management that creates the greatest amount of stress is business finance and credit, especially when it comes to the uncomfortably fine line between personal and business.
To help us sort through the touchy topic and navigate the process of establishing your business credit on the books”, we connected with Jake Lunduski from Credit Card Insider, a credit and finance resource whose mission is to empower consumers and business people to use credit to their advantage, with confidence.
Why Is It Important to Separate Business and Personal Expenses?
Business credit reports and scores are separate from any personal reports and scores you have. If you’re starting a new business, your business won’t have its own credit history. Business credit allows you to separate your own financial life from that of your business while also helping to protect you from potential risks and liabilities. It can even improve your chances of getting approved for loans or affect how much you pay in taxes. Your business credit reports contain your business’ activity of payment history and any credit accounts. Your credit utilization can be calculated from information on the report, which is the ratio of your total debt to your total credit limit. Lastly, you’ll find any public records such as bankruptcies or liens against your business.
Much like your personal credit scores, your business credit scores estimate the likelihood of late payments and default. Just as with personal credit, better business credit comes with a number of benefits beyond money savings, including:
- The ability to secure bigger loans and a better chance of approval.
- Lower interest rates on loans, credit cards, and insurance.
- Improved or better relationships with your suppliers and merchants.
- More ability to lease bigger office or commercial space.
- A better reputation for your business.
What Steps Need to be Taken?
Now that you’re fully armed with the info behind the importance of business credit, it's time to start walking the walk and get yours established:
- Incorporate Your Business - Incorporating your business allows you to establish separate bank accounts, and a separate credit file under your business name. You can choose between a C corp, S corp, or LLC. You could also choose a sole proprietorship, but then your business and personal credit are tied together, so you’ll have to switch from that to establish a separate business credit history.
- List Your Business - Credit bureaus can find your business and create a file for you. Therefore, you should list your business name and address in directories to make it easier for them. Have your business’ phone number included as well.
- Get an EIN Number from the IRS - An Employer Identification Number (EIN) gives your business certain privileges like allowing you to open business bank accounts. You can easily apply for an EIN online for free through the IRS.
- Register with D&B -Register your business with Dun and Bradstreet for free by submitting an application. This establishes a basic credit profile with the credit bureau. After submitting, they’ll create a D-U-N-S number for you that keeps track of businesses of all kinds.
- Open Business Bank Accounts - One final step to help keep your business and personal finances separate is to create a business bank account at the institution of your choice.
After establishing your business’s credit, how can you grow it?
- Open a Business Credit Card - One of the biggest ways to build up your business’s credit scores is to open a business credit card using your business name. Keep in mind that having more than one card for your business makes it easier to keep your credit utilization low. Most business credit cards report to at least one business credit bureau. Your business card activity won’t usually show up on your personal credit reports unless the account becomes delinquent or enters a negative status, but some issuers, like Capital One, report regular positive business card activity to personal credit bureaus. At Credit Card Insider, we always advocate responsible use of any and all credit cards. Just like with personal cards, take the time to understand the card’s terms. Never charge more to the card than you can pay off, or else you’ll likely end up spending more in interest and late fees. Always remember to pay your credit card bills on time. Late payments can bring your credit scores down.
- Establish Trade Lines When Possible - Whenever your business does business with another merchant, see if it'll report trade lines to the business credit bureaus. This means they’ll report the account and any payment history, which allows that information to show up on your business credit reports. If the business you’re working with doesn’t report, you can request that they start.
- Watch Your Credit Reports -Since you’ve established a business credit file and added accounts to it, make sure to stay on top of your credit situation and monitor your business credit reports whenever you get them. Errors do happen, and they can show up at any time. An incorrect entry could mean higher interest rates or another factor that is keeping your scores lower than they should be. If you do see any errors on your reports, dispute them immediately with one of the major credit bureaus.
Credit Card Insider’s mission is to empower consumers and professionals to use credit cards to their advantage, with confidence. This starts with an understanding of how credit cards work and how to build credit. Credit Card Insider’s focus is on the long term: building habits and knowledge that lead to excellent credit decisions.