As a small business owner, it’s critical that you and your business are considered good credit risks. Establishing and maintaining creditworthiness can mean the difference between whether or not a supplier decides to do business with you, what credit terms and interest rates you will pay, and whether you will get approved or denied for funding.
Proving that you have a solid track record of making prompt payments and managing debt will help position you as an attractive customer to banks and lenders like Summit Financial Resources. Addressing the following factors now will help you get off on the right foot in 2019 and maintain the creditworthiness of your small business well into the future.
Choose a legal structure.
Creditors typically look for signs that a business is viable and profitable. Whether you are a startup or on the fast track to growth, establishing your business as a separate legal entity not only adds legitimacy, but it may protect your personal assets as well.
The legal structure you choose is likely to impact how you pay taxes, how much paperwork is required to file, and how your business can distribute its profits. In the eyes of many lenders, if you operate as a sole proprietorship, you carry a much greater risk compared to a corporation or limited liability company (LLC). Forming a corporation or LLC disentangles personal debts from business debts.
Consider taking additional steps to establish a solid foundation for your small business, such as:
- Obtaining an EIN (the business equivalent of a Social Security number) from the IRS, along with a DUNS business credit profile number from Dun & Bradstreet. If appropriate, acquire a business license.
- Establishing a physical address and separate phone number and bank accounts for the business.
- Preparing a professional business plan.
- Maintaining impeccable financial records, including income and balance sheets and tax return documents.
Keep your business credit report up to date.
Unlike your personal credit, there is no single data source for determining your company’s creditworthiness. However, Dun & Bradstreet (D&B) produces a small business information report that is similar to a personal credit report. It is generally considered the industry standard by banks and other lending institutions for evaluating both new and existing credit relationships. Potential vendors and other companies may also consider the D&B report to help them decide whether or not to work with you.
Review your company’s D&B report to ensure that it is up to date and accurate. D&B relies on information provided by customers and lenders as well as from business owners. Include as much data as possible to create a complete picture of your business’s credit history, such as financial statements, AR/AP aging reports, and payment records that show you are meeting credit terms. This is particularly important if you make cash payments that will not otherwise show up in your report. The more information you provide, the easier it is for lenders like Summit Financial Resources to provide you with credit when you need it.
Manage your personal credit.
Your personal credit score can be a key factor in securing financing from investors, obtaining a business loan, or getting credit from vendors. While personal credit is not typically the sole factor creditors rely on as a predictor of business behavior, experts recommend making every effort to effectively manage your personal credit and improve your credit score if it’s less than perfect. Many lenders look at your personal credit history as a measure of your ability to meet your financial obligations. Creditors may also take advantage of blended commercial scoring tools that integrate both personal and business credit to assess and predict small business risks.
Address any tax liens.
At Summit Financial Resources, we find that clients are often surprised to find tax liens on their credit reports. Having a tax lien means that you have failed to pay a tax debt and the government has a legal right to your property, including real estate, personal property, and financial assets.
If a tax lien appears on your credit report, you need to take action to resolve it. A tax lien can negatively impact your credit score, much like a bankruptcy or a judgment. First, determine if the liability has been paid. If it has, contact the IRS about getting a release to clear up the issue. If you are uncertain about the status of the lien, it may be best to work with a tax professional who is well versed in handling tax controversy cases.
Keep in mind that, according to Fair Credit Reporting Act, tax liens can stay on your credit report for seven years from the date they are satisfied or paid. However, the IRS has a Fresh Start initiative that allows consumers who have paid certain tax liens or entered into an installment agreement to request they be withdrawn and removed from their credit reports.
Become familiar with UCC filings.
Many small business owners borrow money or open lines of credit. When a bank or commercial lender makes a secured loan, they file a Uniform Commercial Code document (UCC filing) indicating their collateral interest in the borrower’s assets. The UCC filing is recorded with various state and local jurisdictions to protect the lender’s interests.
It is important to develop a basic understanding of the types of UCC filings most often used by lenders and to do a search on your small business at least once a year. If a UCC filing is filed against your business, it does not affect your credit score, but it may prevent you from borrowing money from a new lender or selling your business. It is advisable to make sure the UCC filing is terminated by a lender as soon as the loan is paid off and to keep good records in order to avoid surprises down the road.
Consider a custom financing solution.
Protecting your company’s credit is essential to securing the funds you need to thrive and grow. If you are experiencing problems establishing credit and need financing for your small business, Summit Financial Resources can create custom financing solutions with reasonable rates and structures that banks and other commercial finance sources cannot provide.
We’re collateral-focused, which means we aren’t fazed by things like how long you’ve been in business or if you’ve had trouble paying your bills in the past. What we care about most is that you are providing great service to great customers who are paying you on time. We are proud to partner with our clients to help them cover short-term costs and invest in opportunities for long-term growth.
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Summit Financial Resources specializes in working capital financing for small to medium-sized businesses that need increased cash flow. We provide working capital financing through invoice factoring, asset-based lending, inventory lending, and equipment financing.