Business Debt Management Part 2

Except in rare cases, the traditional way to stretch business debt into profit dollars is with someone else’s money. To do this, a business must have credit. Unfortunately, most start-up businesses tend to “borrow” from their owners! If you are a small-business owner, you need protection of your private finances.

Get an IRS Business Number. This is urgent, easy and free! (How often do you see those words together?) As a first step toward protecting your personal assets, you should get a business number, or Employer Identification Number (EIN), from the IRS. You can do so by calling the IRS at 1-800-829-4933.

When starting a business, you do not need to accomplish everything at once. Separating business debt from personal debt will take time, but small steps will help you out in the long run. Perhaps you cannot afford to file for a corporate business yet, for example, but you do have your EIN. When you are able set up a corporation, you can use the financials from this start as a sole proprietorship. While it may not necessarily protect you from business debt right away (see the debthelp.com article on Business Debt Management, part 1), it will allow you to get there in the future.

When you are ready to incorporate, ask an attorney about what private debts your corporate form can adopt to relieve you from personal responsibility. I know of one new lawyer, in fact, who negotiated with a corporate law firm to adopt his student loans.

Similar to personal credit reporting, business reporting agencies also have tough standards that you need to understand. It is possible to obtain some limited business credit when your own personal credit is not enough, but it is not nearly as easy as many promoters claim. Virtually all businesses willing to extend credit will ask for the primary business contact’s social security number, and if that is your social security number, the payment history will not be going to any business reporting agencies. To obtain business credit, you must to have acceptable scores from these Big 3 agencies:

• Experian Business
• Equifax Business
• Dun & Bradstreet

To receive ratings from these companies, you need to have three credit cards in your business’s name and five vendor accounts for your business, all reporting to the Big 3.

Tips:

1. Avoid the “quickly build corporate credit” offers that are expensive or (even worse) that try to use your personal data, including your social security number.
2. Beware of business or commercial debt consolidators who make it sound too easy. They might be angling purely for private debt consolidation, which defeats your efforts to build a debt shelter.
3. You will need an address, phone number and utilities in the business name, and associated expenses to prove that you own a real business. Remember, even if you cannot afford this right now, start by getting your EIN from the IRS. You can begin as a sole proprietorship or partnership..
4. You can be listed on Dun & Bradstreet for free, rather than for the usual $499 fee to become a registered business.

The methods a corporation can use to obtain credit depend on the amount of credit needed. Talk to your local bank about the documentation required to open a business account. Keep in mind that a business account is rated by the amount of money usually available in the account. To get a good score, you need to have an average balance of at least $7,000.

As you can see, it takes time and a solid plan to build corporate credit, but this should not stop you from trying to attain other funding for your business. For example, Small Business Administration loans are available to start-ups, and there even are groups of private investors (“angels”) who will help to push a bright idea along. The goal is to avoid assuming personal debt by giving your corporate child the time it needs to stand independently.

Finally, one of the most helpful ways to aid any new business is to be sure your personal finances are working for you as well as possible. By managing your household budget, you acquire valuable skills that can assist you in your business finances. As you seek out the (free) advice of your local Small Business Administration or Chamber of Commerce, consider talking to a consumer credit counselor, as well