Three mistakes you don’t want to make
1. Not establishing your business in the correct Commercial Structure. Many individual business owners do not believe that they need to set up their business as a legal business entity, since only they work. They have no employees or co-workers, so they combine their business accounts with their personal accounts. This combination of funds and expenses can cause a major crisis for the business owner. By keeping your business activity separate from your personal activity, you are presenting a clear image to tax collectors that you are operating as a “business” and not as a “hobby.” This will help prevent suitable business expenses from being “dismissed” due to confusion caused by mixing personal and business expenses.
Remember, when banks lend to individual “sole proprietors,” it is considered a personal loan and is reported to personal credit bureaus like Equifax. By setting up your business as a corporation, partnership, or LLC, lending institutions will report your business creditworthiness to trade credit bureaus and your FICO scores will not be affected if you have used your Employer Identification Number (EIN) on the has the lender. You will also look more professional in the eyes of a bank or other financial institution if you are established as a business entity.
2. Not presenting your business as “established” and in operation. This means that your business has its own address and phone number. It is very important to have your business listed in the national “411” directory. Many people run their business using a cell phone number as their business phone number. However, a cell phone number is not acceptable to most financial institutions. When you apply for a loan or line of credit, the lender will call “411” to verify that you are an established business with a specific address and phone number. Lenders also don’t want to see PO Boxes or UPS addresses. They want a real physical address. The address listed in the “411” directory must match the address listed in the State because financial institutions will go online and verify your business information with the State. If they don’t find a match, you may be denied trade credit.
3. Not checking your credit report. You know how important it is to regularly review your personal credit reports to make sure there are no errors on them, but it’s also important to review your business credit report. When you’re a new business trying to apply for business lines of credit or business credit (ie Home Depot Card), vendors and financial institutions typically require a personal guarantee before extending business credit to your business. If you haven’t checked your personal credit reports and there are errors, you may lose your ability to obtain business credit due to negative data. This is also true for business credit reports. Dun & Bradstreet is the best known of the commercial credit bureaus and if false or negative information is reported to D&B, you will also be denied credit. Financial institutions look to lend money to a business that is reported to be a good credit risk. It is critical that your personal and business creditworthiness is accurately reported to the credit bureaus, and it is up to you to regularly check that all of your financial activity is accurately reported.
Learn more about setting up your business structure and learn the secrets of presenting your business as “well established” so you can get credit lines and vendor credit cards without risking your personal FICO scores.
