Corporations do not normally have glistening credit scores from the start. In fact, building corporate credit is most of the time a long process of proving financial responsibility of the corporation. Do not wait for your corporation to be in dire financial need to apply for credit but rather apply for credit even when you do not need it. Lenders favor financially stable companies when considering who to lend to. Outlined below are some items that you can do that will help you build corporate credit.
1. Incorporate your Business
The first thing that you should do is register your business as a corporation.
As a business owner, you have a variety of entity structures to choose from and it is best for you to discuss this with your accountants and/or attorneys as to which corporate structure works best for your business.
Once a structure is decided, then you will need to apply for your Employer Identification Number (EIN) also known as form SS-4 with the Internal Revenue Service. Ultimately it is the EIN that is used when establishing and maintaining corporate credit.
2. Maintain a Good Personal Credit Score
The initial stages, lenders will heavily weight the personal credit scores of business owners when making their credit decisions. It is imperative that you have a good personal score as this will improve your chances of getting funded. To boost your personal credit score make sure you keep your credit card spending under 30% of your limit, pay all your bills on time, and minimize your applications for new credit. Moreover, lenders will also check personal credits of partners or investors with more than 20% stake in the business, so it is important you plan for this accordingly.
3. Apply for Credit Even if you Don’t Need it
A good fundamental strategy is to apply for credit as a corporation shortly after forming even if you do not need it at that point in time. Keeping in mind that lenders are usually wary of lending out huge sums of money to startups, it is recommended you apply to borrow smaller amounts at the beginning. In addition, you should also apply for commercial credit accounts from major retailers such as Home Depot or OfficeMax. All in all, this should give your corporate credit a boost.
4. Frequent Use of Credit Cards and Lines of Credit
One common mistake that most business owners make is that they apply for a line of credit, get approved but end up not using it because they are wanting to avoid paying interest. Consistent use of your lines of credit will help you build excellent corporate credit. It also goes without saying that your payments to the creditors should be made in a timely manner.
5. Build Relationships With More Than One Lender
Remember the saying “don’t put all your eggs in one basket?” Well, the same saying applies here. Don’t rely on a single lender to build your credit score; banks can change their lending policies overnight, cutting your credit limit overnight. You might instead choose to have a credit line through a credit union or a locally-owned bank and have a credit card through a major bank. Using a variety of lenders means you can constantly build and vary your credit history.
6. Work With A Company To Establish Your Business Credit
There are companies that specialize in helping businesses and corporations alike to build corporate credit. As an added benefit, these companies utilize preexisting relationships and offer your company credit without personal guarantees. More so, these companies know the ins and outs of establishing corporate credit and will attempt to lead you in the right path by outlining the necessary steps that it will take for you to build up your corporate credit. It is highly recommended that you research which company will fit your current needs and to use one established in the most critical stages which is at the startup phase when your entity has no credit at all.
An option that most businesses consider is hiring someone to handle these tasks. However, hiring in-house staff is not the most practical option for small businesses and startups. Having an employee on their regular payroll can cause a serious hike in their expenses. For such businesses, a much more ideal and affordable solution could be to outsource. According to Forbes, outsourcing accounting and payroll functions not only makes a business cost-effective but also offers numerous other advantages that can keep it competitive and efficient.
Here are some benefits that outsourced accounting services and payroll can bring to your business explained comprehensively by JFDI Consultants:
1. Bring Down Operational Costs
Reduced operational cost is one of the most compelling reasons for outsourcing accounting and payroll functions. Compared to hiring full-time employees for these jobs, outsourcing them can be extremely cost-effective as companies can be spared from paying salaries and employer taxes. Furthermore, outsourced accounting services are tax-deductible.
Currently, the average annual salary of accounting and payroll managers is $104,000 and $46,000 respectively. In addition, the payroll taxes amount up to 12% of the salary. Adding up the figures, a company typically has to pay over $160,000 annually to have in-house accounting and payroll managers. On the other hand, outsourced accounting and payroll services offered by JFDI Accountants start at as low as $500 per month.
As a result, outsourcing accounting and payroll functions can save companies as much as $150,000 annually, which is quite a substantial amount for any small or startup business.
2. Work with the Experts
Outsourcing to a firm that is entirely dedicated to accounting and payroll management means working with the experts in the industry. With their extensive experience, these professionals know accounting and payroll processing inside out and are well-adept at handling problems and challenges. Moreover, these experts are also aware of changes in government tax and compliance regulations, ensuring that there are no processing mistakes.
In comparison, if entrepreneurs decide to manage these tasks on their own, they have to give up a lot of their precious time. They are also prone to making mistakes that can lead to penalties charged by the IRS. According to the IRS, every year more than 40% of small businesses pay over $800 individually in penalties due to improper or late payments and filing of their taxes. Alternatively, hiring professionals in-house with the same level of expertise can be unaffordable for most companies. In most cases, companies hire less experienced professionals and have to deal with low quality of work and turnover issues.
The professional team at JFDI Accountants has extensive experience and knowledge of tax laws and regulatory mandates on local, state and federal levels. With outsourced CFO services and payroll management, companies can rest assured that they will be getting reliable and effective long-term solutions for their needs.
3. Focus on the Core Competencies
Accounting and payroll functions can take a lot of time to be completed. Perhaps it is time that small business owners or founders of startups can’t afford to spare? Devoting a huge chunk of time to these activities month after month results in entrepreneurs losing the focus from what matters the most – their core business function. When the core function of a business is neglected, its performance and profits both suffer.
Outsourcing leaves business owners with enough time to focus solely on technical and strategic business matters that can improve the bottom line. It also saves them from dealing with lengthy recruitment processes and turnover issues associated with in-house staff. Outsourcing contractors usually offer month-to-month no-strings-attached service agreements that can be arranged according to a business’ needs and convenience.
4. Get Enhanced Security for Your Data
Financial and payroll data of a company is extremely critical, making its security a major concern. When it comes to such data, there are always certain risks such as identity theft, tampering with or sabotaging company records, and funds embezzlement. Managing unbreakable safety and security of such data when using an in-house accounting or payroll software can cost a business huge sums of money on a regular basis.
From maintaining backups to updating security software regularly, entrepreneurs need to give constant attention to the entire process or risk compromising the confidentiality of their data. Trusted outsourced solutions can save businesses from worrying about safety and security of their crucial business data. Backups, security software and everything else that is needed to keep a business’ data safe is a part of the service provided.
Considering all the advantages it has to offer, outsourcing accounting and payroll functions definitely makes good business sense. Contact JFDI Accountants today to find out if outsourcing is indeed the best solution for your business.