On Thursday, July 12th – Call the Shots hosted “Business Finance Success Strategies. Call the Shots is a Black Professionals Network‘s program designed to provide professionals in different stages in their entrepreneurial journey the guidance and tools to formulate their own business. Workshops and seminars work through the process of business formation, developing a business model, and creating multi-tier strategies for success. July’s workshop featured experts Hyacinth Henderson, Managing Director, and Financial Planner at The Henderson Financial Group and Antoinette Roman, Regional Sales Director at Financial Education Services. These professionals provided the attendees with information on business financial systems and establishing good personal and business credit and how they can affect one another.
Here are the top takeaways from the workshop!
1. Personal credit affects business credit
As an entrepreneur, you should be aware that your personal credit can affect your ability to secure a business loan or other types of financing. Therefore, creating steps to legitimatize your business and separating your personal finances and business finances to establish separate scores. This can be done by forming your business through the State Department and creating your EIN with the IRS. Next locating financial institutions that will allow you to open a business account under your business name and securing a business credit card that does not require your social security. This will be difficult as the amount of credit card issuers allowing you to apply with the EIN is shrinking. The reason why? Well, applying with only an EIN will not only make it impossible for a card issuer to run a personal credit check on you, but it’ll also exclude them from requiring you to provide a personal guarantee for any of your spending on the business credit card. However, do your research and develop relationships with a financial institution that will. However, whether applying with a social security card or not, once you secure your card you can begin establishing a separate business credit score by registering your business with Dun and Bradstreet. They are the main company in the U.S. that provides commercial data, analytics, and insights for business.
2. Establishing your business credit
You will need a DUNS number assigned to your business, and contrary to popular belief, you can obtain this for free. While D&B has several paid services and credit-building programs, you don’t have to pay in order to be issued a DUNS number. While you can register and create a business credit file with D&B, Equifax and Experian will only populate a report based on the information they have available. Making sure that your business name, address and phone number are listed on all the major directories, and opening a secured credit card that reports to the credit bureaus, will ensure that they maintain a credit file for your business.
3. Bad credit? Ways to build your business credit
You may not have been able to secure a business credit card but you can still build your business credit (don’t forget to work on improving your personal credit in the process). Establish a line of credit with vendors. Companies like Amazon, Office Depot, Staples, FedEx, Home Depot, and Lowes are just some of the big-box stores that offer lines of credit and report to the credit bureaus. These are relationships that might already be established, requiring you only to contact them and request a net-30 credit line. There are also several industry-specific suppliers that could potentially report to the credit bureaus, as well: You just need to contact them to find out.
4. The big deal about business credit.
Business credit allows you to borrow funds to scale up your business. While cash is king, credit is power. Some of the largest companies utilize loans to grow their business. Walmart is a perfect example of a multi-billion dollar company with dozens of trade lines. Waiting on clients or vendors to pay can slow down your cash flow and credit/loans allow you to have funds to supplement your operations and keep your business running. A start-up business cycle typically involves more money going out than coming in. Therefore, credit helps fill in those financial gap periods. The importance of your credit score will vary from lender to lender, and even within different types of financing. Generally speaking, it is easier to qualify for a loan with more desirable (i.e. lower) interest rates and a longer repayment term if you have a higher credit score.
However, there are many other factors that lenders consider when scrutinizing your business loan application, such as your years in business and profitability, as well as the overall financial health of your business. Don’t let a poor credit score stop you from exploring all of your options such as Small Business Administration loans, term loans, and/or short term loans.
5. Cleaning up your credit.
While overtime your business and personal credit will be separate by establishing some line of credit with vendors or securing a business credit card, it is still important to improve your personal credit to increase your financing power. There are plenty of services that can aid you in cleaning up your score. Consider reputable companies but in the meantime, there are several things you can do yourself.
- Monitor your credit reports directly with Experian and Equifax
- Contact the companies directly about any discrepancies and disputes.
- Pay your debts on time.
- Ensure that you maintain a credit utilization of less than 30% to 40% of your total debt.
- You can increase your credit by 50+ points by paying down balances. Companies report every billing cycle and a new credit score can be calculated after the close of the billing cycle. On average people can see significant increases in their credit score within 60 to 90 days.
6. How tax write-offs are utilized in business
Tax write-offs are important to finance strategies and should be utilized differently between personal and business taxes. The common misconception for personal taxes is that the more write-offs the better. However, this all depends on your goals. When qualifying for a home, too many write-offs can offset the number of your earned income making you a risky investment for a mortgage company. However, the IRS tax code is written favorably for businesses. There are several legitimate write-offs such as business meetings, travel, and meals for your employees that can be written off. Great news for your company’s bottom line!
In addition, your relationship between your personal and business taxes will vary between the two based on your goals. “When you start a business you are upgrading from the kiddie table to the adult table” – Hyacinth Henderson and that means having control over the decisions that affect your business and yourself. Above we discussed the importance of separating your business and personal scores. Well separating your personal and business expenses is also crucial. Paying yourself a salary to cover your personal expenses is one key step to separating your personal and business expenses. But do so in a way that makes sense to your goals. You own the business, giving yourself a lofty salary may sound attractive initially but personal taxes are generally taxed at a higher rate than business taxes. Reach out to a financial expert to better understand your goals not only for yourself but your business. Create a plan with your financial adviser that helps you become financially successful in both arenas!