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August 17, 2020

How to Build Your Business Credit

One of the notable differences between operating as an S-Corp vs a Sole Proprietorship is the separation of your credit score from that of your business.

Since the business has its own tax identification and credit history you may find, especially early on, that credit for your business may be hard to come by.

We've covered the various credit types that S-Corps can receive in a previous blog post so let's talk about how you can use some forms of credit to build your company's history to get the really impactful credit you need to expand and dominate with your S-Corp:

  1. Get a business card, use it, and pay it off every month
    Most banks who deal with business checking and savings accounts can also provide a credit card to account holders (for newer companies a personal guarantee from a shareholder is often necessary). You will likely receive an opening limit that's pretty low but after several months of responsible use, most banks will start increasing the balance. Capital One also has very reasonable entry-level business cards though the interest on them is often excessive, that is only a concern if you don't pay off the balance each month.
  2. Keep the score clean
    Stick with the one card at first, and don't apply for a bunch more. The more applications of credit you have will be a red flag for creditors and tank your credit score. Late payments, carrying "revolving" balances on your cards, and exceeding the credit limit are all ways in which you can hurt your chances of getting better financing options in the future.
  3. Check your credit score with the issuing bank
    You can often call your bank or lending partner and ask them what your business credit situation is, to gauge if now is the right time to seek better financing options.

Once you have a decent enough score as a company you can apply for more impactful credit forms, such as a Line of Credit and/or a Small Business Loan.

Lines of Credit are short-term revolving credit vehicles that are meant to help manage near-future cash flow.

If you are constantly waiting to pay your business obligations because your clients are also paying you slowly, a line of credit can help bridge the gap between your bills and invoice payments or help cushion a big hit to your cash unexpectedly.

Small Business Loans can be obtained from your bank and/or the Small Business Administration (which is a great resource for newer businesses to help expand) but these loans often come with long repayment terms and potentially some very expensive interest rates. They should only be used in order to expand your business or invest in greater advertising/marketing; you want this loan to significantly increase your income, not save it from going under. If you're using it for the latter reason then you may really just be delaying (in a very expensive way) the inevitable end of the company.

Let us know if you’re seeking credit of any type; With any form of credit, it never hurts to talk to your advisor at Formations to see what the best route would be. We are here to help!