Small Business Credit

Small business credit, especially a credit card for your small business, can be very useful as an accounting tool. Whether you decide to incorporate, remain a sole proprietor, or operate as an LLC, having a purchasing card for your small business helps you make day-to-day decisions about whether purchases are personal or business-related. Each monthly bill also gives you a chance to track your spending and make sure that purchases are being justified for business purposes. At tax-time, those purchasing records can come in handy to help prepare your tax returns, instead of wading through a giant stack of receipts. You’ll still have to keep all those receipts, of course, you just won’t have to look at each of them again at the end of the year.

Plus, establishing business credit, and growing that credit line, can be helpful if you later want to make a large expansion and apply for a larger credit line or loan.

This article will discuss several aspects of small business credit:

Business credit principles
Applying for business credit
Using your business credit card
Tracking purchases

Future articles will build on these topics and help make tax-time, and estimated tax-time, easier, as well as increase your business flexibility.

Business credit principles

According to various movies and TV programs, as soon as you want to start a business you are supposed to create a business plan and go to a bank to apply for a loan. Then, the bank will determine whether you can start your business.

In the real world, that isn’t how it usually works, and certainly isn’t the best way for most people. Unless you are running a cookie-cutter type of business (and in which case you probably need to rethink your plan), no bank is going to loan money to start any business unless you already have an inside track. What is more likely to happen is that they are going to want to loan you money based on your home equity; your business itself will have little to do with it. Even the Small Business Administration (SBA) turned into a home equity sponge years ago; that agency no longer has much to do with actual small business development in any meaningful way.

Also unlike what you hear about in popular media, you don’t just get to start a company, run up a lot of bills, and bankrupt it. Every credit card, line of credit and loan your business takes out will have a personal guarantee behind it from the principals. This means you. This is one big reason why you need to be very leery of going into business and opening up lines of credit with people you don’t implicitly trust. Even with an LLC or corporation, they could run up the debt, take off to Tahiti, and leave you holding the bag. More on this topic later.

Applying for business credit

A month or two after you incorporate or start an LLC, you will start getting offers for company credit cards. Your paperwork with the state is public domain, and triggers a rash of various offers for credit (cards and outright loans) financial advisors, satellite service, dog grooming and so on. You will probably toss most of these offers, but take a look at the credit card offers. Some of the best credit cards will have useful programs associated with them, including buyer protection, but those services will likely have annual fees associated with them. Sort through the various credit card offers and look for the ones which have no annual fees; you can apply for the fee-based cards after your business has enough purchasing volume to make those programs worth it.

By the way, “pre-approved” means just that, as in you haven’t been approved yet. This will become clear soon enough.

Shred the loan offers (if you don’t have a cross-cut shredder, get one soon). Most businesses, if following the bootstrapping approach we talk about on this blog, will never need an actual business loan. Credit cards and lines of credit are another thing entirely. Look through the credit card offers and apply for a few of them. You will quickly note the personal guarantee attached with each. Don’t worry if you don’t have much income, personal or business. Where it asks for desired credit, put something small, like $100 or $250. The goal is to just get a card. You can increase your credit line later, and a small limit now is better than asking for too much, getting turned down, and then getting approved for a small limit later. If you get approved at all, they will probably give you a limit of something like $1000 or $2000, anyway. They want your interest money, after all.

At first, only apply for credit cards for the principals, like a husband and wife team, until you know more about what you are doing, and the people involved.

Yes, you can get a debit card on your company checking account, but that isn’t the point. You want your business to start developing its own credit history, and debit cards don’t help much with that.

Using your business credit card

Don’t think of your business credit card as a credit card, think of it as a purchasing card. Yes, I just said to not get a debit card, but think of it that way anyway. The goal is to only buy those things that you would write a check for, as well as to make Internet purchases easier. If you can’t pay your balance off each month, you are doing it wrong.

Also, develop the mental discipline of separating your purchases between business and personal. You will make mistakes from time to time, but if you do, have the company reimburse you for business items you bought by accident as you, and you reimburse the business for accidental personal use of the business credit card. We’ll show the reimbursement process later, but an email between you (the person) and you (business employee), or better, other company principal, explaining the error and an accompanying check in whichever direction, helps clear the air at tax time. Working through this process a few times will really change your outlook on business purchases for the better.

In some cases, you will want to have an agreement between you (the person) and the company for some ongoing purchases, but that is a topic beyond the scope of this article.

Tracking purchases

We’ll get into some accounting principles in future articles, but for now, start a spreadsheet using your open source office software package to track each purchase as it is made. Or, if you are using something like Quickbooks, be sure to enter each purchase accordingly. Unlike personal purchases, which are fire-and-forget, business purchases are not completed until the monthly bill is paid and audited using a process we’ll show later. What you’ll learn from that process is the complexity which arises when you purchase many business items on one ticket (the same issue applies when using checks). For example, you get office supplies, a printer and some snacks for a vendor visit on the same trip to the office supply store. Each of these three items are treated differently tax-wise. Because of this different treatment, each should be broken out as separate purchases, but you’ll see them all as one item on the bill later. Ponder this for a moment, and you’ll probably decide in the future to make separate purchases for different tax classifications once you know what the requirements are.

In this article, we’ve laid the foundation for applying for and using business credit. As always, nothing you read here is legal or financial advice, just reflecting our experiences and how we got started. If you want to give your business future flexibility, building up a history of credit-worthiness is a great option, and a good way to get started is with one or more small-limit credit cards. Used properly, and with diligent self-discipline and record-keeping, business credit cards can be a great business tool.

Your Small Business Checking Account

You started your small business, and now what? An important first step is to get a business checking account, even if you intend to operate as a sole proprietorship. Review our “Should I Incorporate?” article for an overview of the different formats you can choose for your business. For anything other than a sole proprietorship, you will certainly need one or more business checking accounts. Start with one account now; we’ll explain why you will want more than one as we go and in future articles. This post is on the simplistic side, but we’ll build on these ideas in future posts.

To open a checking account, you will need to request that account in your business name using forms the bank will give you. Corporations, for example, will have to pass a corporate resolution, but that just means having the principals sign a form provided by the bank, generated by them using information from corporate documents they will request from you. The process is streamlined and very simple; it just sounds more complicated than it is at first.

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The Key To Success

“Your job is to make my job easier.”
Tony Soprano

Every now and then a TV show will produce a nugget of wisdom, and that quote above is one of the best I’ve seen. In the TV show “Sopranos”, mob boss Tony was telling a subordinate to get his act together and stop doing thoughtless things that made Tony’s day harder. On the other hand, for years, the cartoon strip “Dilbert”, the TV show “The Office”, and the movie “Office Space”, all of which I enjoy, laid subtle memes that bosses are out-of-touch idiots and suitable objects for ridicule. These media icons, and others like them before and since, are successful because they take real situations and amplify the silly parts. Soon, everyone in the office or in the shop is laughing about how “that’s so true!” about their own boss, when in reality the comparison is probably only superficial. High-tech people are especially prone to absorption of these memes and subsequent impatience with bosses and coworkers alike; the stereotypical IT guy isn’t, in turn, a source of humor for no reason. In my younger years, I succumbed to the dark side a time or two myself, and in the process limited my own success. If we are honest with ourselves, most of us (show of hands, here’s mine) have dipped our toe in this pool. The ease of Internet web-snarking and trolling, allowing these habits to quickly metastasize across organizational boundaries, doesn’t help, either.

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Incorporation Tax and Filing Myths

Since posting the “Should I Incorporate?” article, some have brought up issues that fall into the realm of myths. It is important to note that entire industries have sprung up around servicing small businesses, including CPAs, HR professionals, financial planners, payroll services and so on. Some of these professionals greatly overstate the risks as a form of demand creation. Marketing professionals refer to this strategy as “Fear, Uncertainty and Doubt”, or FUD. A lot of what we’re going to be talking about on this site is to deliberately attack FUD, so that you can see the underlying issues that you need to understand in order to run a successful small business. Although our focus is on more high-tech businesses, many other business types can use a lot of the information you’ll find here.

Let’s jump right into some of the more common myths regarding taxation and annual filings, and remove some of the FUD involved.

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