Establishing business credit is a crucial aspect of scaling a business successfully. However, it's important to understand that business credit wasn't originally designed for startups. Instead, it was intended for established businesses that have a proven track record of revenue generation. This allows them to take advantage of vendor lines and funding options that can facilitate further growth. In this blog, we'll delve into the intricacies of business credit, debunk misconceptions, and highlight the significance of timing when pursuing this avenue of financing.
The Truth Behind Business Credit Advertisements
It's not uncommon to come across enticing advertisements promising quick access to substantial funding through business credit. However, it's crucial to recognize that these funding options are often not loans or lines of credit as many may assume. Instead, they are typically vendor lines that come with specific terms and conditions. For example, they may require payments within a net30 timeframe or be limited to specific corporate lines like those offered by Best Buy or Home Depot. Understanding the nature of these funding options is essential to make informed decisions.
The Hidden Realities of Business Credit: Personal Credit Score and Personal Guarantee
When it comes to establishing business credit, there are some crucial factors that many business credit gurus often neglect to mention. One of these is the requirement of having a personal credit score of 680 or higher to secure business credit cards. This means that, contrary to popular belief, your personal creditworthiness plays a significant role in obtaining credit for your business.
Furthermore, it's important to note that even if you secure business credit, many lenders will require a personal guarantee. This means that, as the business owner, you become personally liable for the debt in case your business fails to repay it. In practice, this means that if your business is unable to meet its financial obligations, you may be contacted by the lender's legal team for debt collection. They may have the authority to go after your personal assets or cash in personal accounts.
It is essential to recognize that while business credit may offer some level of separation between personal and business liabilities, it is not a foolproof shield. Business debts can often have personal repercussions, putting personal assets at risk in the event of business failures or financial struggles. Understanding the true implications of business credit can help entrepreneurs make informed decisions and take necessary precautions to safeguard their personal finances.
The Consequences of Liquidating Business Credit Cards: Legal, Financial, and Long-Term Implications
Liquidating business credit cards or corporate cards can have severe consequences, impacting not only the entity itself but also your personal financial standing and future business endeavors. It is crucial to understand the various legal, financial, and credit-related ramifications that may arise from such actions.
Liquidating business credit cards without adhering to the terms and conditions set by the credit card issuer can result in legal consequences. These may include breach of contract claims, penalties, and potential lawsuits, especially if the cardholder is personally liable for the debt.
Consequences from Banks
Banks, as the issuers of business credit cards, can be significantly impacted by the liquidation of these cards. If the debt is not repaid or settled appropriately, the bank may take legal action to recover the funds or report the debt to credit bureaus, negatively affecting the credit scores of both the business entity and the individual cardholder.
Banks, being the recipients of the funds and responsible for handling monthly credit card payments, have the authority to freeze or even close accounts when such activities occur, as they directly infringe upon their terms and conditions.
In one case, a business owner's business bank account, into which the business owner had paid several invoices, sought to recover the funds. This led to a chain of events, including the cessation of credit card payments and the demand for refunds for transactions made with those cards.
Consider the instance of a business owner who had liquidated a substantial amount of $87,000 within a span of three months, utilizing what is commonly known as the "liquidating and seasoning the account" hack. However, this approach proved detrimental. Once her bank became aware of this activity, they promptly halted her credit card payments and demanded that she refund all invoice payments. Consequently, her account was frozen, and the credit card companies flagged her for further scrutiny.
These circumstances highlight the serious consequences that can result from attempts to liquidate business credit cards. Legal implications may arise when funds are misused or when financial institutions suspect fraudulent activity. It is crucial for business owners to understand the risks involved and to carefully consider the potential far-reaching consequences before engaging in such practices.
Credit Card Companies
As mentioned previously, if engaging in illegal activities such as liquidating business credit cards, banks have the authority to freeze or even terminate your account. In a similar vein, credit card companies will not hesitate to suspend and ultimately close your account.
When banks halt credit card payments, it can result in late fees, negative marks on your credit report, and a growing debt that may be unmanageable. Moreover, your credit card accounts will be permanently closed, and you could face being blacklisted, making it challenging to obtain credit in the future.
The consequences of liquidating business credit cards can extend beyond the immediate impact on the entity. They can affect future business ventures and personal finances. Even if the entity is dissolved or no longer operational, the credit history associated with the business and the individual's personal credit score may still be affected. This can make it challenging to secure credit for future business endeavors or personal financial goals.
It is crucial to assess the potential consequences and seek appropriate legal and financial advice before making decisions regarding the liquidation of business credit cards. Understanding and fulfilling your financial obligations can help protect your business's reputation, personal creditworthiness, and future financial prospects.
The Timing of Establishing Business Credit
Investing time and money into establishing business credit should be a strategic decision. It's important to consider one's sales performance before embarking on this journey. If a business is struggling to generate sales and faces financial constraints, it may not be the ideal time to pursue business credit. Many business credit options require full payment within 30 days, which can pose additional financial burdens. Therefore, it's advisable to assess the availability of extra capital and the overall financial health of the business before entering the process of establishing business credit.
When exploring vendor options for establishing business credit, it is crucial to carefully assess the specific needs of your business. Procuring multiple net30 vendor lines should only be pursued if there is a genuine requirement for the items or services they offer. However, it's essential to recognize that obtaining these items through credit comes with a caveat - personal use of these items is strictly prohibited. While some may argue that it's their own money and they can use the items as they please, it's important to understand that the credit extended and the items purchased were intended for business purposes.
This principle also applies when purchasing items for the purpose of reselling them for cash. It's crucial to remember that business credit comes with either a net30-60 payment term or a minimum monthly payment, so it's vital to ensure that the money spent contributes to the profitability and successful operation of your business.
It's worth noting that relying solely on vendor lines to establish business credit with the expectation of obtaining loans or higher credit approvals is not a viable strategy. To secure higher approvals or loans, a strong personal credit history and robust business revenue are typically required. Alternatively, settling for a high-interest Merchant Cash Advance (MCA) may be an option for those with lower credit scores and revenue, although it is generally recommended to prioritize building strong personal and business credit profiles for better long-term financial prospects.
Debunking the EIN-Only Myth
Let's take a closer look at the notion of EIN-only loans and distinguish fact from fiction. While it may seem appealing to believe that obtaining a loan solely based on an Employer Identification Number (EIN) is possible, the truth is that such loans do not exist in the lending industry. This misconception may have originated from misunderstandings or misrepresentations spread through social media channels.
In reality, when applying for business loans, lenders require a thorough evaluation of various factors to assess creditworthiness. These factors typically include a combination of personal and business credit history, collateral, financial statements, and the borrower's ability to repay the loan. While an EIN is indeed essential for business identification and tax purposes, it does not stand alone as a basis for loan approval.
Banks, credit unions, and alternative lenders adhere to rigorous lending standards to ensure responsible lending practices. These institutions conduct comprehensive assessments to mitigate risk and protect both the borrower and the lender. The Small Business Administration (SBA), renowned for its support of small businesses, offers loan guarantee programs rather than directly providing EIN-only loans.
It is crucial for aspiring entrepreneurs and business owners to rely on credible sources and seek advice from financial professionals when it comes to understanding lending options. Remember that building a strong credit profile, establishing a solid business plan, and maintaining positive financial practices are key steps towards securing business loans from reputable lenders.
Please keep in mind, while the idea of EIN-only loans may be enticing, it is important to recognize that it is a fictitious concept. Banks, credit unions, SBA, and alternative lenders adhere to established lending practices and evaluate multiple aspects of a business's financial health when considering loan applications. Engaging with trustworthy financial institutions and seeking expert guidance will help ensure a realistic and successful approach to obtaining business financing.
A Quick Recap ….
Timing is everything when it comes to establishing business credit. It's essential to have an established and revenue-generating business before venturing into this realm. Understanding the nature of business credit options, considering financial capabilities, and acknowledging the importance of personal credit evaluations are all key factors in making informed decisions. By strategically approaching the establishment of business credit, entrepreneurs can position themselves for long-term success and growth.