When you're first starting a business and income is limited, you need to pinch every penny and make sure you're spending every dollar as wisely as possible. For most small business owners, that starts in the decision about how you're going to structure your business, because the last thing you want to do is cripple your new company and destroy your own personal FICO scores in the process.
Depending on where you live, registering a new business as a DBA (or "Doing Business As") is pretty inexpensive, typically costing between $25-100. On the other hand, registering as an limited liability company, incorporation, or other corporate designation can cost several hundred dollars or more. But the pennies you pinch here could cost you a fortune later.
Many new business owners are acutely aware that separating yourself legally from your business is a necessity for liability reasons. They know their company's legal structure can help protect their personal property and finances from any liability brought from the business, such as lawsuit, tax debt, or corporate entanglements.
But few new business owners realize that choosing to use a DBA instead of a corporate registration will also mean their new company's credit will be linked to their personal credit. In other words, their personal credit will carry the weight of everything the business does, from general expenses to credit applications to legal disputes, and that could weigh heavily on their FICO score.
Many will argue that having a D&B report will provide some insulation for things like opening new commercial trade line accounts or applying for corporate credit cards, but the D&B scores and ratings oftentimes don't tell the whole story.
If you have a corporate legal structure in place, lenders and creditors can look to other elements, such as activity associated to your business-based bank account, how responsibly you handle your business licenses and Secretary of State filings, or perhaps your business plan and financial accounting practices.
If your company is a DBA that has no corporate parent, then you — personally — ARE the parent! Creditors will look at your personal banking situation, your personal legal entanglements and debts, your personal financial responsibility, and, most importantly, your personal credit. You will be the one carrying the financial responsibility for your business.
And don't forget... D&B is very particular about what payment history can be added to the business credit report, especially business expenses that are paid using personal bank accounts or credit/debit cards. Using personal payment methods when paying for business purchases or expenses will often disqualify them from being added to a D&B report.
Let's look at Kurt as an example...
Kurt started his sign-making business in November of 2017. At the time, money was tight and he needed to put every available penny into materials for an upcoming project, so he opted to set up as a DBA. He knew he would be in a better position to incorporate after the new year and didn't see the point in paying fees in November that he would have to repeat again in January.
Here we are, thirteen months later, and Kurt has had a busy year, so busy that he still hasn't done the necessary paperwork to fully register his business as a limited liability company. His D&B report does have some payments, but is not nearly representing the vast majority of his purchases and payments. In addition, his personal credit has suffered by carrying his business debt, not just in dollars spent, but also with every inquiry from new suppliers.
Every time a potential vendor pulled his D&B report, they saw that him as a sole proprietor. His base scores were enough to earn a second look, but that second look was on his personal credit report. Every new inquiry has taken a toll, to the point where he would now just rather prepay for supplies to avoid adding more. Since all his expenses impact him personally, his debt to income ratio is weighing down his FICO scores like an anchor.
FIRST: I talked Kurt into spending the necessary funds to appropriately register his business. We updated his current D&B data to show the legal structure had been changed. And because it's the same business with just a simple update, his business credit file still shows his business as starting in 2017, but now it's no longer listed as a sole proprietorship.
SECOND: With his new corporate documents in hand, Kurt established a commercial bank account in the company name. This gave him a business debit card and business checks so any future payments he makes to his suppliers can now be eligible to flow automatically into the D&B business credit report or be manually added to the file. He then contacted each of his suppliers to let them know about the business changes and updated his payment methods with each supplier.
THIRD: We created a few basic Net 30 accounts for some of the products and services Kurt was already buying from other suppliers. Those payments will flow in automatically when those companies submit their data to D&B. At the same time, we also started a monthly Creditbuilder service from D&B (about $150/mo) and began submitting his higher-dollar vendors. As those prior payments are added to the report, his scores will continue to climb, and with that, his credit capacity will be boosted.
FOURTH: I had Kurt apply for a business-based credit card that would allow him to transfer some of the business debt he's been carrying on his personal credit cards over to the new card. This will have a significant positive impact on his personal credit report since it will free up some of his available credit. As an added bonus, that new corporate credit card is going to report all that transferred debt onto his business credit file.
All of these steps are simple for ANY business owner to complete, but the benefits are going to be enormous, not just for you, but also for your company. Most new suppliers are content if they can verify a business's credit capacity in D&B, there is less potential for those suppliers to require a secondary inquiry on your personal credit report.
As always, if you have any questions about the best ways to structure your business to improve your commercial credit profile and capabilities, don't hesitate to give me a call. Consultations are free, and most issues are easily resolved right over the phone. 800-918-7505 (ext 2 reaches me directly)