Build Business Credit Without Using Personal Credit
Establishing business credit is an important step for any new small business and helps you maintain a credit history separate from your personal credit history, assists in the experience the business benefits of having good business credit, and it demonstrates separation between owners and the business.
Why separate credit histories?
By having a business credit history separate from your personal one, you can minimize the effect negative events one might have on the other. For example, if you have some financial missteps that impact your personal credit history and score, they should NOT impact your small business credit if you have established a clear separation and vice versa.
Benefits of having good business credit
Having good business credit can provide a few benefits, including:
· Positioning your company for more favorable payment terms with new vendors and suppliers.
· Reducing the number of times, you will need to prepay for products or services purchased.
· Allowing you to obtain better interest rates and credit terms from lenders and banks.
Once you have established and built good business credit, be sure to monitor and protect it, just as you do with your personal credit.
5 Steps in Establishing Business Credit
1) Incorporate your business - The structure you select for your business is important, as it will establish your relationship to the business and your financial responsibilities within it. If, for example, you are operating as a sole proprietor, you’ll be entirely responsible for the profits (or losses) of your business. And if the business fails, your personal assets may be at risk. Choosing a different model, such as a partnership or LLC (limited liability corporation) allows you to insulate your personal assets from any potential business losses. Once you choose an entity for your business your next step will be to obtain a tax ID number.
2) Obtain a federal tax identification number (EIN) - Another important step in establishing business credit is acquiring a federal tax ID number (or EIN — Employer Identification Number). Applying is easy using the EIN application form provided by the IRS. Once you complete the form, you’ll be assigned a 9-digit EIN that you’ll use when filing your business taxes, opening a business bank account, applying for licenses and permits, and building your credit.
3) Open a business bank account - Now that you’ve obtained an EIN, your next likely step will be to open a business bank account. This essential step lets you separate your business and personal assets. Your banking relationships also say a lot about the way you manage your business—and your business bank account will be an important reference source for potential lenders seeking to evaluate your financial strength.
4) Establish a line of credit with vendors or suppliers - Work with a few vendors and/or suppliers to create credit for your company to use when purchasing with them. The human relationships you create are also a big part of your overall business credit picture. By becoming known as a reliable partner in business, you build important references that speak well of your credit. Ask them to report your payment history to the credit reporting agencies. Successful business relationships can be leveraged later to obtain lines of credit or short-term bank loans.
5) Monitor Your Business Credit Score - There’s no substitute for diligence and tracking your business credit score is a great way to stay ahead of any unanticipated blips. Each of the business credit agencies provides a way for you to update basic information about your business. Find outdated or incorrect information? You now have a way to contact the agency to make the appropriate change. With an established business credit report, you may get higher credit approvals, as well as better interest rate
s and repayment terms on loans and lines of credit.
Let Us Assist You In Building Business Credit To Grow Your Business!
Tiffany M. Vaughn, CPA
Cents Savvy LLC