Any small-business owner knows the importance of having a solid financial position. After all, lack of cash is one of the main reasons why small businesses fail, so every business leader needs to ensure that their financial position is sturdy.
Establish Business Credit
When it comes to having good business credit, many small businesses fall short. It can be a real challenge to get the credit score that banks expect you to have when you’re applying for a loan.
Many small businesses that apply for loans still fail to receive adequate funding. In large part this is because of the 2008 recession. So many lenders lost money during that period that now most small businesses are literally paying the price — they can only have loans accepted if their credit history goes back years.
So if you’re a small-business owner and are planning on applying for a small-business loan in the future, you will have to use the right strategies to establish business credit.
First, you will want to ensure that you’re monitoring your personal credit rating. For any small business being considered for a loan, a bank is going to take a look not only at the small business’s credit but also at the owner’s personal credit. In large part, this is because a small business is not going to have as much credit history as a comparable larger company.
Additionally, it’s a smart idea to apply for credit before you need it. That way, you can start to establish some credit with something simpler than a loan. You can do this by obtaining a business credit card or applying for a small bank loan.
Finally, you should consider forming relationships with a variety of lenders, which will make it easier later on when you need a loan. It can be a good idea to forge friendships with small local banks in the area that have given out loans to other small businesses.
Form an Independent Business Entity
Another way to achieve a more solid financial position by the new year is to set up your small business as an independent business entity. There are many benefits that come along with this change.
First, if you set up your small business as either a sole proprietorship or a limited liability company (LLC), it’s easier to deduct legitimate business expenses to minimize what you’ll end up paying on your tax bill. These deductions can be used to minimize your profit tax as well as your self-employment tax.
Additionally, the independent business entity can be used to buy insurance for the business, and this expense can also be deducted, which means even more savings on taxes. Finally, by changing your business to a business entity, you remove the risk that the IRS may claim that your business is not a business but a hobby and deny these deductions on that basis.
Outside of the tax benefits that come with being an independent business entity, adding “Inc.” or “LLC” to the end of a business adds instant legitimacy and authority to it. If you’re a consumer looking for a service or product, you’ll be more likely to trust a business with this kind of title.
Finally, an independent business entity can exist perpetually, which means that, even if ownership or management changes, the company can continue to exist and run as it was before.
Consider the positive changes you can make in order to have a better new year. Whether it’s ensuring that the company is ready for the post-holiday slump in sales or ensuring a solid financial position with strategies such as establishing business credit and forming an independent business entity, the coming of the New Year is an opportunity for positive change.
If you have any additional questions on how you can establish better credit, or at least improve your rates this New Year, don’t hesitate to reach out to Currency’s team of experts for additional guidance: here or at 866-326-9766.