February 1, 2008
William J. Lynott
If you haven’t yet taken steps to establish credit in your restaurant’s name, you should do so at once. Using your personal credit profile to obtain credit for your restaurant can be a costly mistake; it makes you personally liable if the business cannot meet payments on its debts. Equally important, personal credit used for your business can have a negative and permanent impact on your personal credit score.
Keep in mind, too, that if you mix the two credit profiles, you may find it difficult or impossible to obtain credit for your business if you develop problems with your personal credit. In short, establishing separate credit profiles for your business and personal life should be a high priority project for you.
Almost every business will need to apply for significant credit at some point; nowhere is this truer than in the restaurant business. To avoid having to depend on your personal guarantee, you must build a positive business credit profile before you actually need it.
Establishing a Separate Credit Profile
The first step in separating your personal credit from your business is to incorporate or form a Limited Liability Company (LLC). Your restaurant must be a separate legal entity to establish business credit completely separate from your personal credit.
The owners of sole proprietors and partnerships are personally liable for everything the business does, including the debts it incurs. Under those forms of business, your personal credit information is mixed in with your business credit information. If your business is already a corporation or an LLC, you’ve taken that most important first step in establishing a separate credit history.
If you have recently changed your form of business from sole proprietor or partnership to corporation or LLC, you must obtain a new Federal Employer Identification Number (EIN). For more information about whether you need a new number for your restaurant and how to apply for it, log on to http://www.irs.gov/businesses/small/.
Be Prepared to Sign a Personal Guarantee
Assuming that you already have a separate bank account under the exact legal name of the business and have obtained all business licenses and permits required in your area, you’re ready to establish a business credit history. Be prepared at this point for requests that you sign a personal guarantee on credit applications until you have a solid credit history in the name of your business. That’s why it’s a good idea to make sure that your personal credit history is solid before you set out to establish business credit.
If asked, you probably shouldn’t hesitate at this point to provide a personal guarantee. That’s one way to demonstrate to potential lenders that you have plenty of confidence in the future of your restaurant.
Once you get the job done, your new business credit history will bring you several important advantages. With solid business credit, you will:
make it easier to buy from vendors on advantageous credit terms
qualify for better interest rates from banks and other lenders
lower your workers’ compensation premiums
make your restaurant more attractive to potential buyers or investors
After you’ve laid the groundwork, there are two ways to get started on the road to solid business credit. First, you should register your restaurant with Dun & Bradstreet (877-753-1444) using your legal business name. Registration is free and it will provide you with a DUNS number. The DUNS number is a unique nine-digit sequence recognized as a universal standard for identifying and keeping track of the 100 million-plus businesses in the D&B database.
When you register, you will probably be solicited to purchase a full credit profile, list price $549. Don’t do it. It isn’t necessary and a small business like yours doesn’t need it. Simply registering at no cost will enhance the credibility of your business with potential creditors and enable suppliers and lenders to learn about your business.
Building Your Credit Profile
If you haven’t already done so, make a few small purchases on credit with one or two of your suppliers. Then, ask them to report the transactions to Dun & Bradstreet and other credit reporting agencies. Keep in mind that your creditors aren’t obligated to send any information to the CRAs; they must do it voluntarily. Most credit suppliers will be quick to report negative credit information, but often they must be prodded to report positive transactions. You may well have a long-standing, golden credit reputation among your individual suppliers, but if none of them bother to report their experiences with you, the CRAs will have no data around which to build your credit report.
That’s why you should let your suppliers know that you would appreciate it if they would help you by reporting your credit history.
Now it’s time to apply for one or two credit cards in the legal name of your business, completely separated from your personal credit.If you’ve laid the groundwork by registering with Dun & Bradstreet and obtaining your DUNS number as well as your EIN, you should have no trouble qualifying for business credit cards totally separate from your personal credit.
If you decide to open more than one business credit card, avoid applying for them all at once. It’s best to apply for one at a time. Then, build up a history with that card before applying for another. Each step of the way, you will be building and strengthening your credit profile.
Protecting Your Credit Reputation
Once you have established a credit history for your business, it’s important for you to guard it carefully. Like fire, credit can be a valuable friend or a dreadful foe. Used sensibly, credit can be a major asset in your business and personal life. Use it carelessly and it can become your worst enemy.
Once the CRAs establish a credit profile for you and your business, they will use the information it contains to generate a credit score. If your score is “good,” it will be easy for you to get credit whenever you need it. If your score is “bad,” you may find it impossible to get credit from anyone.
Be aware that credit-reporting agencies will build your business credit score around a number of factors. These include the amount of credit available to you and the amount of that credit that you have used, whether or not you have a good record of on-time payments and many other variables.
Improving Your Credit Score
A good score will make it easier for you to obtain credit and to qualify for loans at advantageous interest rates. You can improve your score these ways:
Pay your bills on time. This is the smart way to handle credit. Late or missed payments are a sure way to lower your score.
Avoid large credit card balances. Outstanding balances larger than about 25 percent of your credit limit are a red flag to financial institutions.
Transferring balances won’t help. Closing out an account and transferring the balance to another credit card is likely to lower your score. Each time you close an account, you lower your overall credit limit. That makes the same amount of debt a larger percentage of your credit limit.
Once you establish a favorable credit history for your business, those so-called pre-approved credit offers are likely to find their way into your mailbox. These packages offer a temptation to identity thieves who might try to open new credit accounts in your name or the name of your business. Once they get their hands on such a piece of mail, they can complete the offer by listing a different address. Then they will have an account opened in your name without your knowledge.
Fortunately, there is a way for you to opt out of these credit offers. Just visit the official Consumer Credit Reporting Industry website at www.optoutprescreen.com or call 888-567-8688 to opt out via telephone.
Despite its inherent risks, credit in itself is not harmful. In fact, used skillfully, credit can be a profitable tool for managing your financial affairs. Observing these tips will help to make credit one of your business assets, not one of your liabilities.
William Lynott is a former management consultant and corporate executive who writes on business and financial topics. You can reach him at [email protected].
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