You already know I’m not a big fan of debt, and that hasn’t changed. Today we’re talking about credit specifically, the profile itself, the thing that quietly opens doors in the background even when you never plan to borrow a dollar. A business credit profile takes 6 to 12 months to actually become usable, and the moment you realize you need it is almost always the moment something has to be financed fast.
So today we’re talking about why you’re going to wish you started this 3 years from now if you don’t start it today, what your business credit profile actually controls, and the quiet signs the gap is already costing you.
If the second half of your year has a bigger investment on the horizon (equipment, a studio space, an upgrade you’ve been planning around) and you’re not sure if you could actually finance it, that’s the conversation to have now. Send me a message on Instagram @firestormfinance or book a discovery call and we’ll look at your forecast, your cash architecture, and whether the credit foundation is in place to fund what’s next.
Read the Transcript
Welcome back to another episode of Creative Minds, Smart Money. Today we’re talking about an interesting topic, because I’ve talked before about how I’m not a big fan of debt. But I want to talk about debt in a positive light today, and I want to talk about why you’re going to wish you built business credit 3 years from now.
Sometimes things happen when a creative business needs financing and the business credit profile that would have made it easy to get was never set up. The right time to start is before you actually need it.
Business credit vs. personal credit
I want to be clear that business credit and personal credit are often two separate things. They start out intertwined, but the longer you have your business, the more you get reached out to by business creditors who are looking at your business profile and not your personal one. So it doesn’t touch your personal credit, which is why I want you to get a feel for it.
One of the things we want to talk about is the pattern in years 2 and 3 of businesses. A lot of creative businesses arrive at year 2 or 3 without any business credit at all, and then there’s a moment where it becomes a problem. The business started off with a personal credit card and never moved off it. Maybe that’s what you’ve done. You got a Capital One or an American Express, and you’ve only used it for your business, but it’s still personal credit. It’s under your name.
If we use my name as an example, Samantha’s credit is being positively affected by this Capital One card I opened for my business, but I’ve never opened anything under Firestorm Finance. So there’s the delineation. It’s under Samantha, not under Firestorm Finance. (That’s not actually true for me, I do have business credit, but it’s the pattern I want you to see.)
You might say, “I have great personal credit and that’s been enough, I just haven’t needed anything big enough to be financed yet.” But a credit profile takes time to build. Your personal credit profile took time to get where it’s at. A business profile takes about 6 months to start building, and if it was never started, when financing comes up, you just don’t have it.
The realization that you need it usually shows up at the worst possible moment, when something needs to be funded fast. As a plain-as-day example, let’s say you’re a graphic designer and you really need a new computer or tablet that will let you draw better. It costs thousands of dollars, and you know that if you could get financing for it, it would really help you spread things out. You know I’m anti-financing and anti-payment plans, but sometimes these things are a necessity. Sometimes you need something now and you don’t have the cash access for it, so you need to plan around it.
If you don’t have business credit built up, the financing isn’t going to be what you need it to be. Because if you go to a bank and ask for $10,000 but you’ve never had a business credit profile, they’re going to say, “I don’t think we can do that,” because they don’t see any credit on your business.
What your business credit profile actually controls
What does business credit actually control? What’s the difference between business and personal credit? What does this profile change about your financial life beyond just getting a credit card?
The financing tiers your business qualifies for depend on your business profile, not just your personal one, and a lot of financing companies that work with businesses are only looking at your business profile. They’re looking at what you’re bringing in, how you can handle financing, all of it.
Personal guarantee requirements relax when the business has its own credit history. If you have bad personal credit but your business has phenomenal business credit, they’re more likely to go with the business credit and ignore your personal credit, because the business has had a great history.
Vendor terms and lines of credit (net 30, net 60) open up when your business has been reporting payments. Let’s say you own a screen printing company and you want to get vendor terms. They’re going to want to look at your P&L, but they’re also going to look at your credit history. They want to see you’ve been making payments on time to all the obligations you have.
The separation also protects your personal credit from the business side. If you miss a payment on the business side, when business and personal are tangled together, that hits your personal credit too. But when you have separate business credit, it only hits the business side.
I am so anti-business debt of any kind. So anti-business credit and financing. But there comes a point when it’s necessary, especially for big projects. Copywriting and website design can cost upwards of $8,000 or $10,000. If you need that immediately and your business needs the upgrade, financing is sometimes the only option.
The 2-3 year conversation vs. the 5-6 year conversation
When I talk with my clients about credit, if they’re thinking they really do need to finance something, there are two conversations.
The year 2-3 conversation is the easier one. We start building a credit profile now, when we don’t need it. The next 12 months pay off later, when maybe we need to finance something even bigger, the business has grown, we need a building, whatever it is. The financing is set up, the profile is there, we’re ready to go. Essentially what I tell clients to do is put a single subscription on a card or line of credit and pay it off every month. You build credit the same way you would on a personal card.
The year 5-6 conversation, when there’s no profile, is where I have to tell them, “Here’s what financing is going to cost you that it didn’t have to.” When you have a better credit profile, financing costs less, sometimes less in fees, sometimes less in insurance. The difference is years of patience and setting up versus a few hours now. It’s also a conversation where I refer you to a financial advisor for the bigger financing strategy, because that’s not my lane. I don’t know much about the financing side, so we connect you with someone who is an advisor that can help.
What a real credit building plan looks like
What do we actually need to do to build credit so we have some backlog whenever we’re ready to finance something? There are 3 prerequisites for the profile.
- An EIN. A lot of business owners think they don’t need one. Even if they have an LLC, some of them don’t ever get an EIN because they think they’re going to be just them. But an EIN is so simple to get. It takes 5 minutes, you don’t have to pay anyone, you go on the IRS website and get it.
- A real business bank account. That means an account under your business, under your EIN, with a business bank, that’s recognizable.
- Vendors that report payments to commercial credit bureaus. You don’t just need yourself making payments. You need vendors actually reporting to the credit bureaus.
The first business card is a sequencing question, not a “pick any” question. So look at the card carefully, look at what it gives your business, look at what it offers you as credit.
If we’re getting a line of credit, there’s a discipline to making sure it’s paid in full every month so you stop sliding into debt. We’re building credit, we want it to be good credit. We don’t want to be building a process of debt. We want to make sure we’re building good credit by paying it off monthly.
There’s a 6 to 12 month timeline before the profile is actually usable for the bigger asks: $10,000, $20,000, $50,000. A lot of smaller creatives, this isn’t necessarily going to affect right now, but if you have aspirations of a building for employees, computers for the team, a place to congregate, this credit conversation is the thing you need to start having early. We don’t want it to turn into debt, but we do need to analyze it and see if it’s an option we can work in.
Signs the gap is already costing you
How do you know if the lack of a credit profile is already costing you?
You can’t get vendor terms like net 30 or net 60 because the business doesn’t have history or credit to check. The vendors aren’t willing to give you terms because there’s no history. You’ve never had a line of credit or a card, they can’t see consistent payments, they’re not going to give you terms because they don’t know if they can trust you.
Every business card application has to come with a personal guarantee, and you’ve stopped applying because of it. A piece of equipment or a studio space conversation died because you didn’t have the financing to afford it, because you looked at your business card and thought, “no one is ever going to approve me for this.” You’re funding business expansion out of personal credit, which is a different kind of expensive, because now it’s building on your personal debt side instead of the business debt side, which is where we actually want this transformation to happen.
The business credit conversation sits inside a bigger CFO conversation about how we’re going to fund the next stage of the business. We look at it with your forecast, your cash architecture, and your financing, and we pull it all together to make sure you could actually afford this and that financing is the right call at this stage.
If the second half of your year has a bigger investment on the horizon and you’re not sure if you can afford it, let’s have a conversation. Let’s chat about it and see if it’s something we can get you into.
As always, if you liked this episode, please like it, share it, subscribe, share it with friends and family, so we can get more people listening to this podcast and have more conversations like this.
I wish you the best week ever, and we’ll see you next week.
Farewell, my fellow travelers.
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