Building Corporate Credit as Part of Your Business and Estate Planning Strategy

Did you know that your business should have its own stand-alone credit score? Most Small to medium sized business owners usually don’t know it’s possible, let alone how to get started. 

John spent decades building his small construction company into a thriving business. He invested not

only in equipment and staff but also in creating a solid reputation as a craftsman contractor. As he approached retirement, John decided to pass the business down to his daughter, Sarah, who had been working with him for the last five years; she’d gone through all of the requisite licensure requirements, not to mention her ability to instill confidence in their clients and referral partners; she had an eye for quality and was a great manager of his team. 

John also wanted to protect his personal wealth, which included his home and retirement savings. And he wanted to pass along his business to his daughter without those personal liabilities landing on her shoulders. 2008 had been a tough year that tested him and his ability to provide for his family and he never wanted her to have to go through that.

John’s estate attorney explained the importance of building corporate credit for his business, separate from his personal credit and assets. Although the business had been successful, John had been using his personal credit to secure loans and lines of credit for the company. This meant that if the business ever faced financial trouble, his personal finances could be at risk. Additionally, it could make it harder for Sarah to run the business without relying on John’s credit history.

Taking his advisor’s recommendation seriously, John decided to establish corporate credit tied to the business’s EIN rather than his SSN. Over the next couple of years, the business built a strong credit profile, allowing it to secure loans for equipment upgrades and expand operations without impacting John’s personal finances.

By the time John retired, the company had a strong credit history of its own, separate from him. Not only did this protect his personal assets, but it also made it easier for Sarah to take over without needing her father’s personal guarantee on future loans, or her own. The business’s value had increased, making it a valuable asset in John’s estate plan, ensuring that his family could continue benefiting from the company for years to come.

What are the lessons learned from John’s developing succession plan?  There are three major benefits to establishing corporate credit, whether you are just beginning your business in earnest, or approaching retirement:

Asset Protection: By separating personal and business finances, corporate credit helps safeguard personal assets from business liabilities, ensuring that no matter what happens in the economy, even with business debts or lawsuits, personal wealth remains protected.

Business Continuity: Establishing corporate credit allows a business to secure loans, credit lines, and other financial resources independently of its owner, which supports smoother business operations and continuity after the owner's passing or retirement.

Estate Value Optimization: A business with a strong credit profile can increase its overall value, making it a more attractive asset for beneficiaries or potential buyers, thereby maximizing the value of the estate.

Unlike personal credit scores, corporate credit does not develop automatically; rather, like a secret club, it’s very difficult to even sleuth out the rules of the financial playbook that larger corporate leaders leverage for themselves. That’s why small business owners find themselves still signing personal guarantees for equipment loans and such even after years of stellar credit behavior. 

If you’d like a free diagnostic review of your company’s credit profile, please reach out to Tricia Call, Corporate Credit Consultant at 435-314-7711.