For independent contractors, cash flow is always an important issue. From finding start-up funding to procuring the capital needed for sustained growth, access to money is necessary to keep your business running.
According to the SBA, over 65% of business owners use credit cards for business purchases - but only 50% of those cards are actually in the company's name. Building business credit that's separate from your own personal credit is an important part of growing a business. Even if you are bootstrapping your way through the early stages of your independent consultancy - or even if you have funding from investors to work with - at some point in the life of your business, it will pay off to have built up a positive business credit rating.
There are three steps in the process of building up business credit. We've outlined what you need to know about each one so that you can move away from using your own personal credit and get started on the path towards robust business credit.
Step One: Trade Accounts
In the beginning phases of your independent consultancy, banks won't offer you credit in the name of your business alone - you'll be required to demonstrate your creditworthiness through your own personal credit score, and to secure your business loan or line of credit with your own personal guarantee.
But there is a way to begin building credit in your business's name alone, and that's through the judicious use of trade accounts.
A trade account is an arrangement through which you purchase items for your business from suppliers or retailers, and then pay for them at a later date, usually 30 to 60 days after purchase. There are two important things to note when opening a trade account, however. First, check to be sure that the vendors you're doing business with will report your payment history to the business credit agencies. And secondly, be sure to pay those invoices on time every time. Doing so will set the stage for a successful transition to step two.
Step Two: Business Credit Cards
Once you have been successfully handling five or six trade accounts for some time, your business's credit rating should be strong enough to apply for a few different business credit cards. In order to avoid negative marks on your business credit at this stage, be careful to only approach banks you think are likely to approve your application.
You may still be asked for your personal credit information as well, but banks will be much more likely to take a chance on you with that demonstrated payment history, and issue a card in the name of your business. Again, make sure that these banks will be reporting your payment history to the business credit agencies under your business name.
Step Three: Negotiating Power
Now that you have proven your independent consultancy's creditworthiness through the use of credit cards, you can approach banks with much more confidence that you will be approved for much more substantial loans in your business's name. And in fact, at this point, you should even have some negotiating power, since you will have such a strong credit history to back up your request for funds. You will be able to negotiate away your personal guarantees on any cards that still have them, and rely solely on your business credit.
Although independent contractors are running a one-man (or one-woman) show, that's no reason to handicap their borrowing power by relying on personal credit alone. Building up business credit is important for any business, whether it has one employee or thousands.
Learn how to calculate a cost-based bill rate with our new, easy-to-follow video tutorial.
News and notes for independent professionals and their clients. This is the October 17, 2016 edition.