SET UP BUSINESS PROPERLY
BUILD BUSINESS CREDIT & MAXIMIZE FUNDABILITY
To set up business properly is not as difficult as you may think for a business to get approval for financing if you understand what lenders and creditors are looking for: FUNDABILITY. Setting up a business properly can be time-consuming; however, it is well worth the effort, as a proper set up is directly proportional to a business’s success.
fundability TO SET UP BUSINESS PROPERLY
Fundability, or lack
The risk factor associated to setup business properly is a substantial consideration for lenders. Traditional funding sources, i.e., banks, will employ stricter underwriting to an application of a business perceived as a high risk, or will simply deny the application altogether. Lenders associate risky industries with high potential of personal injury or property damage, excessive cash usage, unstable revenue, etc., which can severely adversely affect the business’s chance of obtaining funding.
Almost every major bank that issues credit is part of the Small Business Financial Exchange, and they all share information about businesses. Vendors such as LexisNexis, Dun & Bradstreet, and Experian gather this information and put it onto credit reports. If you choose the wrong NAICS code to identify your business and it is associated as high risk, it will be much more difficult for your business to get credit approvals.
For all these reasons, it is extremely important to understand NAICS codes and carefully choose the right one for your business. If there is more than one code that could apply to your business, choose the one associated with the least risk. This is not considered illegal or deceptive. Be sure to provide the NAICS code on all applications to banks and lenders, so that it is communicated to the SBFE, and thus disseminated to the vendors and business credit reporting agencies.
Along with the correct NAICS, be sure to carefully choose the name of your business. If it IS in a high-risk industry, leaving the industry reference out of the name can also help prevent credit denials from lenders.
For example, a pawn shop owner can name the business “Mike’s Emporium, Inc.” instead of using the words “pawn shop” in the name. Again, it is not illegal or deceptive to do this. Make certain the business name, along with any DBA filing, you put on the application matches EXACTLY the business name and DBA filing listed at the Secretary of State and online, as well as on all corporation documents, business licenses, utility, and bank statements.
The business address must be a real, physical building with a deliverable address. In lieu of a brick & mortar building, you can use a “virtual office” for the business address. However, refrain from using a home address for the business, as lenders will check Google Maps and the US Postal Service to determine if you’re using one.
NEVER use a UPS box or Post Office box as a business address; some lenders will outright deny credit if they see this. Be sure to file the business entity with the Secretary of State for your state, i.e., the same state as your business address.
Set up a business entity and business identification number (EIN). EINs are available free of charge at IRS.gov. The EIN is used to open a bank account and to build a business credit profile. The business must be a separate legal entity from you in order to distinguish personal (consumer) vs. business (commercial) credit.
You can set it up as a C corporation, S corporation, or LLC. An attorney or tax advisor can assist with determining the correct business entity based on its purpose. Stay away from sole proprietorships and partnerships, as they often are not regarded as credible or legitimate by lenders. A corporation or LLC will reduce your personal liability, and at the same time give your business the perception of credibility to lenders.
licenses and permits
business bank account
Open a business bank account strictly for the business in the business’s name. Keep personal funds completely separate from the business. Even if you purchase a shelf company, open a business bank account as soon as possible and start running funds through it to begin seasoning the business.
ChexSystems is a credit report score used to determine risk based upon your account management which takes into consideration how long it has been opened, which is another good reason to open a business bank account as soon as you can. The business bank account’s start date helps creditors determine the amount of risk associated with a business. Make sure all information on the bank account matches your business’s information everywhere else.
BUSINESS CREDIT REPORTING AGENCIES
Set the business up with business credit reporting agencies. Look for your business on Dun & Bradstreet’s site. If not found, you can get a free D-U-N-S number. This number yields a Paydex score when you make timely payments to vendors and creditors. Once in the Dun & Bradstreet system, you can search for your business on Experian and Equifax.
Experian can also assign a Business Identification Number (BIN) through their BizSource. Consistently paying vendors and creditors on time yields you a Paydex score of 80, a 90+ Equifax score, and a good FICO small business score, which strengthens and solidifies your business’s fundability.
Personal (consumer) credit can also be very helpful for getting business funding, particularly if you apply with a conventional lender, such as a bank. As with your business credit, make sure your personal credit is good to excellent to further strengthen your business’s fundability.
SETTING BUSINESS PROPERLY
You can see how taking the time to setting up your business properly can provide a strong foundation upon which to build business credit, which maximizes fundability and helps your business grow and succeed. Remember, you control your business’s fundability, and ultimately, its success. Consistency is key!