Business credit myths

Business credit myths

Building and managing corporate credit can be a game-changer for small business owners. It provides businesses with the ability to secure financing for unexpected expenses, operations, growth initiatives, and investments. However, the world of corporate credit is multifaceted, with numerous industries dedicated to servicing it. This includes business credit cards, small business loans, accounts receivable factoring, merchant account cash advances, lines of credit, equipment financing, secured/unsecured loans, and more.

Despite years of study and application, there are still many misconceptions surrounding corporate credit. To shed light on this topic, let’s explore the top 10 myths that persist in the world of business credit, with a focus on the South African context.

Myth 10: Sole Proprietorships Can Establish Business Credit

In reality, sole proprietorships are not considered separate legal entities. Instead, they are seen as personal extensions of the owner, lacking legal protection. When you seek credit for your business as a sole proprietor, you’ll often need to provide your personal identification, such as your social security number. Consequently, you are personally responsible for all debts and agreements entered into on behalf of your business. This includes any actions taken by partners in the name of your business.

Myth 9: Using Personal Credit for Business Has No Effect on the Business’s Liability

Using personal credit for business expenses can have significant implications. It may lead to an “alter-ego” determination by regulatory authorities or financial institutions, potentially piercing the corporate veil. This would expose the owner’s personal assets and make them directly liable for the company’s debts or penalties. It’s crucial to maintain a clear separation between personal and business finances to protect your liability.

Myth 8: You Can Easily Obtain Unlimited Business Credit for Real Estate Investing

Investing in real estate can be classified as a high-risk industry, making it challenging to obtain substantial business credit within this sector. Most banks and financial institutions are cautious when dealing with real estate-related businesses. To navigate this hurdle, consider establishing a business that engages in activities like business development, consulting, marketing, or training alongside your real estate investments. This separation can help you access the credit you need while conducting your property investments under a different business arm.

Myth 7: Credit Repair Is Illegal and Ineffective

Contrary to this myth, consumers have the legal right to repair their own credit under the Fair Credit Reporting Act. While some individuals opt for credit repair companies, it’s essential to choose a reputable firm with a positive track record, as verified by the Better Business Bureau (BBB). Ensure that any credit repair service you use complies with the Credit Repair Organizations Act (CROA). Note that nonprofit organizations and Credit Union Service Organizations (CUSO) are exempt from CROA.

Myth 6: All Suppliers, Vendors, and Lenders Report to Business Credit Bureaus

In reality, not all suppliers, vendors, and lenders report your business’s payment history to business credit bureaus. While there are over half a million businesses willing to extend credit lines, fewer than six million of these entities report to business credit agencies. Moreover, some businesses only report sporadically, often as infrequently as once every six months. Therefore, building your business credit profile requires careful selection of partners who actively report your payment history.

Myth 5: All Business Credit Cards Report to Business Credit Bureaus

Despite the multitude of business credit cards available, fewer than forty issue cards without requiring a personal credit check or personal guarantee. These select cards report exclusively to business credit bureaus, thus allowing you to separate your business and personal credit histories. It’s essential to identify these cards when establishing your corporate credit profile.

Myth 4: Every Business Has a Business Profile with Business Credit Bureaus

Building a business profile with business credit bureaus isn’t automatic. In some cases, a business owner must acquire a D-U-N-S number and submit their business information to create a Dun & Bradstreet (D&B) profile. Corporate Experian and Small Business Equifax, on the other hand, generate business profiles when a creditor or vendor reports payment history. Different business bureaus may require distinct registration processes before establishing an account for your business.

Myth 3: Purchasing a Shelf Company Guarantees Access to Unlimited Business Credit

Shelf companies, while advantageous in some respects, are not a guarantee of unlimited business credit. Lenders consider various factors when evaluating creditworthiness, such as your business’s bank rating, balance history, financials, tax returns, income statements, and more. While an older shelf company may carry some benefits, it’s not a shortcut to securing extensive credit without a comprehensive credit history.

Myth 2: A Strong Paydex Score Alone Ensures Access to Business Credit

While a robust Paydex score from Dun & Bradstreet is important, it’s not the sole determinant of your eligibility for business credit. Lenders evaluate several factors, including your bank rating, balance history, Non-Sufficient Funds (NSF) record, and personal credit scores. A holistic approach to building business credit is necessary to increase your chances of securing credit lines, lease credit, and business loans.

Myth 1: An 80 Paydex Score Guarantees Unlimited Business Financing

Perhaps the most persistent myth is that achieving an 80 Paydex score with Dun & Bradstreet is equivalent to having a 720 personal credit score. While a high Paydex score is beneficial, it alone won’t guarantee access to unlimited business financing. Your creditworthiness is influenced by various factors, including the size and history of your credit lines, the financial health of your business, your industry, and more. It’s essential to maintain a comprehensive business credit profile with all three major business credit agencies to maximize your borrowing potential.

In Conclusion:

Building and managing corporate credit is a nuanced process that requires a clear understanding of its complexities. It’s crucial to debunk the myths surrounding business credit to make informed decisions and leverage the power of credit effectively. At Kredcor, we specialize in helping businesses establish and manage their corporate credit profiles in South Africa. We offer tailored solutions that align with your business objectives and help you navigate the intricacies of the business credit landscape. Don’t let misconceptions hold your business back; partner with us to unlock the full potential of your corporate credit.

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