Savvy entrepreneurs understand the importance of pacing business expansion to ensure success. Still, for many, there will be a point when it’s time to scale up (more inventory, employees, etc.), but the bigger issue often centers on finding the money to move forward, and many will walk through bank doors woefully underprepared.
Entrepreneurs with solid business credit history are the most likely to secure loans. That means the entity you’ve created must have its own financial records. Unfortunately, too many owners don’t strategically separate business and personal finances until they are on the hunt for new funds—and are shocked to find out that banks want to see the business’ records, not their personal ones.
“The biggest mistake I find with most of my clients is that folks are still operating as sole proprietors, even if business is thriving,” says Arnita Johnson, CEO of AMB Credit Consultants and author of The Ultimate Business Credit Guide. Johnson says establishing your business’ credit in the business’s name is the true game changer because it positions the business owner to access credit, cash and other resources for growth on behalf of the company.
Whether your enterprise is in the black or red, establishing the entity’s credit identity establishes a basis for investment in staff, inventory, or tools. Similar to personal credit, business credit tells lenders about the company’s reliability. Business owners should thouroughly review credit options available to them. Resources like the Business Credit Finder found on the Wells Fargo Works for Small Business online portal can help you find financing options tailored to your needs.
If you’ve been in business for one year or 10, your small biz will likely only have measured success if you have taken strides toward developing its credit history. Johnson says these are the 10 moves to make if you’re serious about expansion:
1. Do Consider Forming a Legal Entity, such as a corporation, partnership or Limited Liability Company. “If you operate as a sole proprietor, your business’s finances are connected to your personal credit, and you are exposed to personal liability.” Talk to an attorney or accountant about the best way for your business to operate.
2. Do Build a Business Profile. “Set up a 1-800, local, and fax number. You should also invest in a physical address —not a P.O Box. Many lenders require a physical address for a business loan applicant. You can use a shared space to save dollars.”
3. Do Separate Your Funds. “Get a business checking account and only use it for business transactions. If a lender is looking to build a relationship with you, it wants to see a trail of accounts payable and receivable. Lenders want to do business with an entity with an established history.”
4. Do Enlist a Business Reporting Agency. “Unlike personal credit, your business credit profile is public information. Establishing your business track record with reporting agencies, such as Dun & Bradstreet or Experian, allows lenders to track your company’s relationships with other lenders, such as your history with net 30 accounts.”
5. Do Create a Net 30/60 Account. “Supply companies and manufacturers allow businesses to order items on credit that has to be paid within 30 or 60 days. This has two benefits. You build a rapport and your payments will be reported to Business’ Reporting Agency. This is one of the fundamental ways to build credit.”
6. Don’t Take on Excess Debt. “Resist the urge to ask for more credit than you can justify with your business plan or revenue stream. Applying for too much credit makes lenders wary and will lead to extra scrutiny.”
7. Don’t Forget to Polish Your Website. “Lenders are real people who use their instincts to make decisions. They will look at the quality of your website. They will consider whether you’ve invested in an email account with a dedicated doman name, or are just using generics, such as gmail.com. All of these small investments can together establish legitimacy in their eyes.”
8. Don’t Neglect 411. Registering your business’ profile with the nationwide Directory Assistance 411 will help prospective customers find your business and services. Having additional exposure could lead to increased profits, which factor in a lender decision process.
9. Don’t Serve as a Personal Guarantor of others debt, and clearly document loans you make to your business. “If you guarantee another business’s or person’s debt, you will be making yourself personally liable for repayment. This could adversely impact your ability to get credit for yourself or your business in the future. If you do loan your business money, create a written agreement between you and the business that specifies loan amount, payment dates, interest rates, and shows proof of payment. Banks will see the trail as evidence of the business operating on its own accord.”
10. Don’t Just be an Owner. “Fill out a W-4 and let your company hire you as an employee. This serves as additional separation between you and the brand for financial and tax purposes. Be sure to talk to an accountant or lawyer first, as creation of an employment relationship imposes additional tax payment and information reporting burdens that cannot be ignored.”
Information and views provided by Wells Fargo is general in nature for your consideration and are not legal, tax, or investment advice. Wells Fargo makes no warranties as to accuracy or completeness of information, including but not limited to information provided by third parties, does not endorse any non-Wells Fargo companies, products, or services described here, and takes no liability for your use of this information. Information and suggestions regarding business risk management and safeguards do not necessarily represent Wells Fargo’s business practices or experience. Please contact your own legal, tax, or financial advisors regarding your specific business needs before taking any action based upon this information.