The Banking Relationship
Every small business owner understands the importance of vendor accounts, merchant services, working capital, and credit cards to their business. But many completely overlook the single most important factor in building corporate credit until they are weeks, months, even years into the process, and thus set themselves into a pattern of catch-up and keep-up instead of plowing forward.
Many small business owners, especially those with home-based businesses, do not maintain a separate bank account for their business. While being very careful to legally separate their business assets from their personal assets, they neglect to separate the financial elements, often paying for business expenses with their personal checking account or credit cards. They fail to realize how much a good bank relationship can benefit their company's credit file, in both the short term as well as the long term.
When you are working to establish a baseline for creditworthiness, you will often start with small trade and retail vendor accounts who bill on Net 30 terms. You create the accounts in the business name and the business address. In effect, you are working to provide "merit" to your company, validation that your business has expenses, has been trusted with credit, and can responsibly manage that primary level of debt.
When you pay those vendors, it reflects on the credibility of your company. It makes a statement about how responsibly you manage your debt. Few realize that "how" you pay your debt is also a matter of "who" is paying the debt. If paid using a personal bank account or credit card, you are personally assuming responsibility for the debt. If paid using a business bank account or credit card, the business is assuming the responsibility for the debt.
It is at this moment of payment that the determination is made between whether this is business or personal debt (business or personal credit) and whether it should appear on the business credit report or the personal credit report. Maintaining a separate bank account for your business helps to answer the question of responsibility and credibility. Therefore, establishing your business bank account should be one of the first steps in working to clearly define your company's merit.
All business purchases and expenses should always be made in the business name so they can be attributed to your business. All payments should be maintained the same way to insure they are reported onto the business credit report. Vendors and suppliers who auto-report to the credit bureaus will be reporting based upon the debt and the payment of that debt. Which bureau they report to will be determined by your payment practices.
From the moment you open your bank account in the business name, you are laying a foundation with your bank for future goals and achievements, especially if the goal is to be able to achieve credit in the future. With an active bank account, your company is easily able to present a full measure of income and expenses and responsibility toward its financial success. While lackluster or poor management of your finances will impede credibility with your bank, aggressive and proactive banking represents responsibility and creditworthiness.
As your business grows, so do your banking needs. You may add new accounts for capital reserve, Certificates of Deposits, credit cards, or savings accounts for partners or employees. With each small step of growth and responsibility comes a new level of credibility and trust. Whether you hit a short-term snag in the road or are looking to expand your business, your business banker will be the first one who will either stand in your corner or turn their back, depending on how you have nurtured that relationship.
Your ability to provide confidence to lenders and creditors will be largely dependent on how you manage your corporate credibility. Every penny spent by your business should reflect upon your business. If you start on the right foot from the beginning, you are laying a paved path to your goals. If you don't, you may find yourself fighting a rocky and treacherous uphill battle.
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