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Another Reason to Incorporate: Establishing a Business Credit Rating
There are many advantages to creating a corporation to run your San Diego business including:
- Shielding personal assets from business-related creditors
- Tax expensing options
- Other potential tax benefits — “S” Corp status, for example
- Transferability of the business
- Continuity of existence
- Prestige
- Public relations benefits of being an “Inc.” or an “LLC”
In this article, we discuss another benefit of creating a corporate entity to run your business: establishing a business credit rating. In setting up your corporation or LLC, you need an experienced and trusted business lawyer.
San Diego Businesses: What is a Business Credit Rating?
When you form a corporation, you are creating a legal entity that is separate and independent of yourself. Like a person or an individual, corporations and LLCs can exercise legal rights such as the right to own property, open a bank account, enter into contracts, etc. In the same manner, a corporation or an LLC has a credit rating.
San Diego Businesses: Business Credit Rating Bureaus
There are many companies that create business credit ratings by collecting and tracking financial data. Probably the most well-known is Dun & Bradstreet (“D&B”), but Equifax and Experian are also widely-used for business credit ratings. The methodologies used for business credit ratings are different than the ones used for personal credit ratings. As just one example: a D&B rating ranges from 1 to 100; personal credit ratings range from 100 to 800.
Another important difference is that personal credit scores are somewhat automatic. By contrast, for many aspects of your business credit rating, you and your San Diego business must be proactive. With D&B, for example, the key to their credit rating is having a “Paydex number.” But to get a Paydex number you have to sign up with D&B and then D&B must have records of your payments with at least four vendors. Here again you have to be proactive because some of your smaller vendors might not report to D&B. Thus, you may have to prompt them.
San Diego Businesses: Advantages of Having a Good Business Credit Rating
The main advantage of having good credit — personal or business — is receiving better interest rates from lenders and creditors. Maybe you are thinking: “My business is doing great. I do not need a loan.” That may be true now, but who knows about the future. Doing a little pre-planning now might save a lot of heartache in the future.
A second advantage of having good credit is that some vendors will deliver without requiring prepayment or payment-on-delivery. That can be important for cash-flow reasons particularly if you are a reseller or if raw materials are key to making and selling product. Furthermore, good business credit often generates better payment terms. Maybe with so-so business credit, your vendors will offer 14-day turn-around. But with an excellent business credit rating, your vendors are good with a 30-day payment turnaround and may be more forgiving of a late payment or two.
The truth is that for small businesses, lenders and creditors will look to BOTH your personal and business credit rating. So, you should cultivate a good personal credit rating, too. But with two credit ratings, potential lenders and creditors have more information. Maybe you handle business payments in a manner that is superior to how you handle personal payments. There may be many reasons for that. At the business, making payments is “easy” because it is “part of the job” or maybe you have a trusted employee who helps. By contrast, personal or student loan debt might be weighing down your personal scores or maybe payment histories are impacted by spousal/family distractions. Whatever the reason, having two credit scores is helpful to lenders and creditors.
Eventually, having an excellent business credit rating will be more important than your personal credit score. See Huffington Post article here.
Call San Diego Corporate Law Today
If you need legal advice relating to setting up your San Diego corporation, call experienced business attorney Michael Leonard, Esq., of San Diego Corporate Law. Call Mr. Leonard at (858) 483-9200 or by email.
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