(Money Matters) How to build business Credit - Kasfia rashid

Kasfia Rashid - “Money Matters with Kash the Bookkeeper”

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Introduction: 
Hello! Welcome to Money Matters- Ask the bookkeeper series, the accounting show answering burning accounting questions! You know, the ones you would only ask your best bookkeeping buddy! 

Each show will have one main question from the audience with supporting questions from my various travels. Have a question to ask? Don’t be shy, step right on up! You can submit your questions directly to Hello@kashthebookkeeper.com! You may hear your question aired live across the globe! Last week, we discussed the first tough lesson of entrepreneurs- the cash reconciliation. 

The last two weeks were focused on the Assets section of a balance sheet. Today we move on to the Liabilities section! Need a refresher on what a liability is? Check out Seasons’ 3 show here : https://pod.co/money-matters-with-kash-the-bookkeeper/1-money-matters-liabilities-the-untold-story-of-debt-kasfia-rashid

This week’s questions are: How do I build business credit? What are some different ways of building credit? Why is business credit so important? 

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Show Objectives - The Why

Building business credit is similar to building personal credit. In its simplest form, it is exchanging trust and confidence for money. In the financial industry we translate trust and confidence into numbers, a lot of numbers. Credit scores, Ratios, and Interest Rates to name a few.

Building trust and confidence in the business world becomes pivotal to growth, scalability and can result in increased selling price of  your business- aka, goodwill! Having ready and able access to cash reserves and credit can mean the difference between a strong, thriving business and one that remains stagnant. 

What You Need to Know - The What

Business credit lets a company borrow money that can be used to purchase assets to increase revenue, pay for large expenses such as payroll, and control their overall cash flow. For business owners, having a separate legal entity, such as a corporation or limited liability company, provides the unique ability to create a business credit profile, which is then used by credit grantors to determine if they should lend that business credit or not. 

There are several different types of business credit, not just credit cards! According to the Small Business Association1 there are an additional four other types of credit: 

1. Vendor Credit – Vendor credit is when an individual or business offers products or services that your company can purchase on short term financing (typically net 30 terms). There are many vendors willing to extend credit to startups with minimal requirements. In some cases, a vendor may require an initial purchase or deposit prior to extending credit terms.
2. Supplier Credit – This type of business credit is when a supplier is willing to provide supplies to your business and defer the payment for a later date. This type of financing is great for conserving cash flow because it gives you time to sell the products you receive from the supplier before having to pay for them.
3. Retail Credit – Many small and major brand retailers offer store credit cards for businesses. Unless they’re co-branded, the card can only be used in a specific store. This type of business credit may make sense if you have a specific store you regularly use for business purchases.
4. Service Credit – The easiest form of business credit you can establish for the first time is service credit. Your internet, cell phone, cable, satellite TV, web hosting and other utility services are all agreements your company makes with providers.
5. Business Credit Cards – One of the most important tools to keep your personal and business purchases separate is a secured or unsecured business credit card. It’s essential that you apply for a business credit card that reports only to the business credit agencies so you can protect your personal credit as well.

What You Need to Do​​ - The How

So how can you get started? Good question. Since the SBA has been so helpful, let’s see what they recommend! In their blog they supply five simple steps to building business credit quickly!2 

1. File for a business structure such as an LLC, LLP or Corporation. If you are a sole proprietor- your business is not a separate entity and can not build credit. Once your company is a separate entity- be sure to keep your business and personal finances separate! 
2. Now that your business is a separate entity, you can file for a EIN! This is basically your business’ social security number. You can apply for a federal tax ID for free using the IRS assistance tool. While you're at it, apply for a D-U-N-S number as well. Check out the handy articles below to find out more information.3
3. Open a business bank account using your EIN # from above. This is key in protecting yourself and your business, and establishing it as a separate entity. 
4. One of the easiest ways to build business credit is to apply for net terms with vendors and suppliers. As you buy supplies, inventory, or other materials on credit, those purchases and payments get reported to business credit reporting agencies.
5. Monitor Your Business Credit Reports- There are three major business credit reporting agencies so it’s important to monitor each of your company credit files. Each agency collects data from various sources and may have different information about your company.

It’s equally important to establish a diversity of accounts with other types of business credit such as a business credit card or line of credit. Let these five simple steps serve as a starting point to building business credit for your company.

Cited Articles :

1. https://www.sba.gov/blog/how-establish-business-credit-first-time#:~:text=Business%20credit%20allows%20a%20company,to%20purchase%20products%20or%20services.
2. https://www.sba.gov/blog/how-build-business-credit-quickly-5-simple-steps
3. https://www.dnb.com/duns-number.html 

Additional Resources 

1. Check out Kash’s Youtube Playlist: Bookkeeping basics for small business owners. 
2. Get this affordable guide to reconciling any account quickly and accurately! Click here: https://kashthebookkeeper.com/paid-resources/ and scroll down to Reconcile any business or personal account in 4 easy steps!! On Sale now! 
3. Want more KASH? Sign up for the free newsletter! 

Shows: 
Previous: What is Depreciation? 
Next:  How do I put a debt schedule together?

​Written by Kash the bookkeeper  
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