Trucking & Taxes
We all know where our personal credit score stands and how personal credit affects your ability to qualify for financial products. However, as a business owner, you might not know anything about your company’s business credit rating, why this is important, what your rating is, or how to establish and build business credit.
If you’ll ever need credit for your business in the future – with a business loan or business credit card – then your business can’t just get by with a strong personal credit score. Your personal credit will help, but you’ll also need to build a positive business credit history.
What is business credit?
Basically, in the same way that you build personal credit based on your personal financial history, you establish business credit based on your business’s financial history. Meaning how you handle any credit that has been extended to your business, including credit cards, truck loans/leases, lines of credit, and more. Your business credit is tied to your employer identification number.
Why is business credit important?
One of the main reasons why it’s so important to build business credit is because your business credit score is a key factor in a lender’s decision to work with you. Lenders are likely to extend a loan or line of credit to your company only if they see that your business has a good track record of paying your accounts on time and in full. Moreover, when you apply for financing, not only will a lender use your business credit history to determine whether to work with you, but they’ll also use it to determine how much money you qualify for and your business credit score will also factor into what kind of interest rates you receive on your financing.
Business credit is important because it will help you protect your personal credit. If you have poor business credit, you’ll likely need to use your personal credit to secure financing. Although this might be a necessary means to an end during the early stages of your business, it’s never the ideal approach.
After all, one of the first things we preach to any business owner is to separate their business and personal finances and therefore, credit. Using and even maxing out your personal credit cards to fund your business can irreparably damage your personal credit scores. So if your business fails, you’re left with poor personal credit, making recovery difficult.
How to build business credit?
Unincorporated business entities – like a sole proprietorship – are the easiest to work with in terms of starting up and managing paperwork. But with these structures, there’s no legal or financial separation between the owner and the business. In this case, when you choose to work with a vendor or apply for a loan, you’ll have to provide your personal Social Security number. As a result, your activity on your business accounts will be reflected on your personal credit report.
If you want to establish business credit, then you’ll need to choose one of the following structures:
- C-corporation.
- S-corporation.
- Limited liability company (LLC).
- Limited liability partnership (LLP).
Although it’s important to keep your ability to build business credit in mind while making your decision on how to structure your business, it’s not the only factor you should consider. If you’re unsure exactly how to choose the right entity type for your business, you can consult a business attorney or tax professional for help. You should do this anyway as your tax professional will know the tax implications of your entity of choice.
Once you register your business, you’ll need to:
- Apply for an employer identification number through the IRS.
- Open a business bank account.
- Establish a business address and phone number. Getting a dedicated business address and phone number will solidify your business’s separate existence.
Now, you will need to start building your business credit.
- Apply for a Business DUNS Number. The Dun & Bradstreet DUNS Number is a unique nine-digit identifier for businesses. You can apply for one at dnb.com.
- Get a business credit card or line of credit.
- Borrow from lenders that report to Business Credit Bureaus.
- Above all, borrow only what you need (responsible borrowing).
- Pay timely loans, leases, lines of credit and credit cards.
Are we recommending going into debt just to go into debt? No. The most profitable companies are those that have no debt payments, no interest expense, and no lease to own equipment. Is this possible starting in business? Not always.
We recognize there are reasons to build a strong business credit rating and going into debt just to build credit sometimes is a necessity when you are looking at a larger loan in the future for equipment. We just want you to be educated in business which is what TruckerTaxTools.com tries to do for our truckers.
Think before you sign a lease or loan. Look at the contract, interest rate and terms. In this day and age of long contracts and agreements, many don’t take the time to read or understand.
Ask questions. What is my interest rate? How many months? What is my buyout? Can I pay loan/lease off early without fees and interest? Do you report to the credit bureau? You can break it down by simply multiplying the payment amount by the number of months to pay and comparing it to purchase price.
Trucking can be a tough business with rising fuel costs, lower rates, etc. Don’t make it even tougher with loans you cannot afford at rates that are too high.
Good business starts with you. Get advice from your tax professionals. LL
This article has been presented by TruckerTaxTools.com, a division of Taxation Solutions Inc., a company that has been providing income tax and bookkeeping services to the trucking industry for more than 20 years. If you would like further information, please contact us at 877-966-2477. Visit our website at TruckerTaxTools.com This article does not give and is not intended to give specific accounting and/or tax advice as everyone tax situation is different. Please consult with an expert in trucking taxes.