Banks and lenders will provide up to ten times more credit to a business client than they will to individuals or a sole proprietorship. How your business is structured is crucial to the credit limit recommendations established in your business credit profile. When reviewing your file, lenders will require certain criteria be met to validate the age, location, and creditworthiness of a company’s profile, even more so if you are seeking credit without requiring a personal guarantee.
How does your legal structure impact your ability to attain business credit?
Many small business owners think they can skate through years in business solely reliant on their personal credit and are, therefore, placing their own company and personal assets at risk. It is not uncommon for small business owners to secure business loans using their personal credit, or to use personal credit cards to purchase office supplies or equipment. Doing either one typically results in those financial obligations being reported in their personal credit history only.
To completely separate your business and personal credit, you must establish your business as a legal entity that does not hold you personally liable for the debts of the business. Structuring your business to appropriately insulate yourself from these personal risks requires foresight beyond opening your doors and getting your first clients. Eventually you will want to expand, grow, or diversify your business. If you wait, you may find out too late that your company is not structured to get high credit approvals or any approvals at all.
The building blocks for business credit are simple, but first you need to understand the various legal structures available for your specific needs.
A sole proprietorship is the most common form of business organization and is usually the simplest to establish. Sole props are owned by one person who is responsible for day-to-day operations. Sole proprietors include full and part-time businesses, individually run businesses or those with employees, and home-based businesses. A sole proprietor will own all the assets of the business and must also take complete responsibility for liabilities and debts.
Partnerships occur when two or more people decide to combine funds and/or talents to create a business. In general, each partner contributes to all aspects of the business including money, property, and labor or skill. Each partner, in return, shares in the profits and losses of the business. Partnerships are generally an inexpensive and easily formed business structure. One advantage is that each partner is equally invested in the success of the business. A major disadvantage is that the personal assets of all partners can be used to satisfy the partnership’s debt.