Starting Your Own Business? Here’s the First Step You Should Take

Highlights:

• Separate your cash flow: Open a business banking account, and be careful not to use it for personal expenses. 

• Start small with loans: Instead of applying for a huge loan amount, look into smaller loans — like a line of credit from an office supply store or a small vendor.

• Pay your business bills on time, too: When you pay suppliers and vendors, those payments can be reported to commercial credit reporting agencies (including Equifax). Be sure your payments are on time and cover the entire balance or required payment amounts when possible.

You have taken the leap. You have the vision, the drive, and a product or service you believe in. But as you navigate the daily whirlwind of running a small business — from chasing leads to fulfilling orders — it’s easy to swipe your personal credit card for something like office supplies. It gets the job done, right? 

Not exactly. As your business grows, this can create a tangled financial web that can stall your growth, complicate your taxes, and stop lenders in their tracks.

If you want your business to thrive in today’s demanding economy, building a separate financial identity for your company isn't just a good idea, it’s one of the most important first steps you can take.

If you are mixing personal and business funds, it’s easy to lose clarity. You can't easily tell if your business is actually turning a profit or if your personal savings are just propping it up. Come tax season, you (or your accountant) could spend agonizing hours sorting through receipts trying to figure out which coffee run was for a client meeting and which was just a Tuesday morning pick-me-up.

More importantly, mixing finances could put at risk some of the legal protections that structures like LLCs or Corporations provide. If your finances aren't separate, your personal assets — like your home or savings — could be at risk if your business is ever in litigation.

Eventually, almost every successful business needs capital to scale. You might need funding to buy new equipment, hire staff, or launch a major marketing campaign. In fact, 59% of small businesses sought new financing in the past year.¹

However, only 41% received the full amount of funding they requested.¹ Why the denials? Low credit scores and high existing debt levels are the top culprits.

When you walk into a bank, lenders don't just want to see a great pitch; they want to see stability. If you have been using your personal credit to fund your business, your business is virtually invisible to lenders. It has no track record. It’s like a financial ghost.

To get the loans you need, you must build a strong business credit profile. Just like your personal credit report tells banks how well you manage your own money, your business credit report tells suppliers, insurance agents, and lenders how well your company manages its obligations.

Here are some steps to take to separate your finances and start building your business identity:

1. Get an EIN: Apply for an Employer Identification Number (EIN) from the IRS. It’s free and acts like a Social Security number for your business.

2. Open a Business Bank Account: Take your EIN and your business formation documents to a bank to establish an account. Be sure to route all business revenue and expenses through this account.

3. Consider applying for a Business Credit Card: Use it strictly for business expenses and pay it off on time, every time. A business credit card can begin building your business credit history.

4. Pay Vendors Promptly: Establish relationships with suppliers who report your payment history to commercial credit reporting agencies like Equifax.

5. Check Your Report: Pull your business credit report to establish a baseline. Then track your progress as your business grows.

Running a small business is not for the faint of heart, but you don't have to navigate it blindly. By separating your finances and actively managing your business credit profile, you protect your personal assets and pave a clear road toward funding and growth.

Equifax offers the Business Credit Report for Small Business, a tool designed specifically to act as a financial report card for your company. Checking your Equifax Business Credit Report allows you to see exactly what the banks and suppliers see before you ever submit an application.

By actively monitoring your business credit, you can:

• Spot and correct errors: Ensure the data representing your business is accurate.

• Negotiate better terms: A strong business credit profile can help you secure better payment terms with suppliers, which directly improves your cash flow.

• Walk into the bank with confidence: When you know your numbers, a loan application transforms from an intimidating test into a professional business transaction.

Source: 

1. Federal Reserve 2024 Small Business Credit Survey