Do I need credit cards to build my business credit?
Your Business Credit
Elaine Pofeldt is a journalist whose articles on entrepreneurship and careers have appeared in Fortune, Working Mother, Money and many other publications. She is a former senior editor at Fortune Small Business magazine and an entrepreneur herself, as co-founder of 200kfreelancer.com, a website for independent professionals. She writes "Your Business Credit," a weekly column about small business and credit, for CreditCards.com.
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Dear Your Business Credit,
I run a
one-person marketing firm. I first financed my business with my savings. Ever
since it has started making money, I've financed it with cash flow. I am not a
big fan of using credit cards and usually pay by cash, check or debit card for
business expenses and save the receipts for my tax records.
A friend said this
is a big mistake and that I should be doing more to build my business's credit
score. Should I be using credit cards? I
run the business from home and rarely have to travel to meet clients, so I
don't have a lot of expenses. It is an LLC. --
yourself up. There are plenty of advantages to your approach. One is that you don't have to pay interest on
your purchases, as you would with a business credit card or business loan. You
never need to worry that you won't be able to make your debt payments on time
if a client pays you slowly. And if you
avoid bank loans, you never have the hassles of filling out loan applications
or selling a banker on how creditworthy your business is.
are some pretty big downsides, too. Your friend is correct in pointing out that
if you rarely use credit cards at your business, it will be harder to build a
strong credit score. That could work against you if you eventually plan to
expand, using a bank loan. If you need to finance supplies at some point in the
future, suppliers may also look at your business credit score.
harder to build a strong score without using credit cards, it's not impossible.
The first step is making sure you have a credit file with D&B Credibility, a
credit rating bureau for businesses. To check that D&B is tracking your
business you'll need a D-U-N-S number, which you can get for free.
score reflects far more than your credit card usage, and there are plenty of
other steps you can take to build it. For instance, if you do business with
large vendors whom you pay by check or through other means, they may report to
D&B on your payment habits -- so paying them on time can help you improve
your credit profile.
point out that a decision to use or avoid credit cards doesn't just affect your
credit score. There are a few other things to consider.
the legal protections of the LLC, you should not use your personal money to pay
for business purchases. If you continue to avoid credit cards, make sure you
are diligent about using a check or debit card from a business checking account
instead -- not from your personal accounts.
Saying no to
credit cards means you also have to be more scrupulous about holding on to your
receipts. You won't have an end-of-year report documenting your purchases from
a credit card issuer. For business owners who make cash purchases, I highly
recommend using a mobile scanning app to electronically capture receipts on the
go. That way you'll have a backup if the receipts flutter out of your wallet.
suggest looking at some of the business credit card rewards deals available to see if you would come out ahead by putting some charges on a business
credit card. If you're planning to upgrade your computer or other technology
this year, you may be able to rack up enough rewards points to pay for
something else you need at your business -- or a plane ticket for your next
consider your growth plans. If you expect to hire employees at some point, you
may want to reevaluate your reluctance to use credit cards. As more people come
on board, you will need to come up with an organized system for them to make
business purchases. Usually, getting them credit cards under the company name
is the easiest route.
if you don't like using credit, your discomfort about borrowing may outweigh
these other considerations. Every business owner is different, so don't let
your friend sway you into doing something that you don't feel comfortable doing.
See related: How businesses can start on the road to credit, 8 steps to build your business credit profile, Financing your small business with credit cards: A capital idea?
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Published: January 20, 2014