In a way, having good business credit is like possessing a written invitation to the social event of the season. Without it, the necessary doors will remain closed to you. The good news is that there are steps you can take to establish and improve your business credit.
Why is good business credit so important?
When you launch a new company, your goal should be to start fresh. Even so, your personal credit will usually be taken into consideration when you’re applying for loans or seeking support from investors. Building a solid business credit record can help you separate your company’s finances from your personal ones. That way, the fortunes of one will not have an undue negative impact on the other.
Excellent business credit also allows you to make a firm separation between your business and its owners. Once you set yourself up as a corporation or a limited liability company, your personal assets as well as your credit can be protected and shielded from any harm that might befall the business.
Why incorporating your business might make sense.
Unless you have a sole proprietorship or a general partnership in which you and any other owners are legally inseparable from your business, becoming a corporation or an LLC is a very wise move as doing so will help protect your personal assets. Incorporation also lends more credibility to your business once “Inc.” or “LLC” appears after its name. Furthermore, once you’re incorporated, your business name will be protected, preventing other business owners from using it. Your corporation or LLC will exist perpetually, even if there is a change in ownership. You can even deduct business expenses before income is paid to you/your other owners. Finally, both corporations and LLCs have added tax flexibility that sole proprietorships and partnerships do not.
While incorporating or becoming an LLC may seem daunting at first, it is simpler than it seems. Search online for credible resources to guide you through the basic steps, or contact your local Chamber of Commerce, community college, or Better Business Bureau for guidance.
Get a federal tax identification number.
Whenever you file taxes or do work on behalf of your business (such as opening a bank account) you’ll need to show the company’s federal tax identification number, also known as an employer ID number (EIN). This number is also required by many vendors and is necessary if you are applying for a small business loan.
Applying for an EIN is fast and easy. As long as your principal business, office or agency (or legal residence in the case of an individual) is located in the United States or one of its territories, you can simply apply online. In that case, you will receive your EIN right away. You can also complete the application by submitting the form via fax or by mail, although processing times will be longer. International applicants have the additional option to apply by phone.
Open a business bank account.
Although personal checking accounts may seem outdated, the same is not true when it comes to businesses. Use your business’ legal name to open a checking account at the bank of your choice. Then make it a point to submit all business-related payments, including the one for your business credit card, from that account. By doing so, you will be building the foundation of a strong credit history.
It goes without saying, but people need to be able to reach your business and talk to you about your products and services. Whether you choose a landline, VOIP, or a cell phone, make it a priority to set up a phone number in your business’s name. Then advertise it far and wide in directories such as the yellow pages, as well as on social media sites.
Apply for a DUNS number.
Since many vendors will use credit reporting agency Dun & Bradstreet’s Paydex score to determine if your business is a good borrowing risk, it makes sense to open a file with D&B. To do so, you must register for a Data Universal Number System (DUNS), a unique and totally free 9-digit code. The process takes about 30 days to complete.
Get a business credit card.
Having dedicated plastic for your business is important for several reasons. As previously mentioned, it enables you to separate company expenses from your personal ones. That alone should give you sufficient motivation for securing a business credit card. However, there are other perks as well, such as cash back or points that can be redeemed at popular stores. Some cards even offer sign-up bonuses. Finally, having a business credit card gives you additional purchasing power to cover business expenses. In many cases, your credit line will also be higher than you would get with a personal card.
Applying is easy. You’ll just need to provide your legal business name, EIN, business structure (the kind of business you are operating), business address and phone number, and a few other personal details. For new business owners, approval is tied to your personal credit history. If you have personal credit issues, again, you might consider getting a secured business credit card that requires you to give a deposit in case you default. In most cases, you’ll be expected to provide a personal guarantee saying that you’ll pay for the business’s debts out of your own funds if the worst should happen.
Set up a line of credit.
Make a list of all the vendors or suppliers you do business with. Then, institute a line of credit with as many of them as possible. Make sure that all of them report your payments to the major credit reporting agencies, and pay all of your bills on time. Setting up recurring payments with those to whom you owe money is one of the best ways to guarantee that you do not get behind on your debts. By so doing, you are establishing and building a good reputation and a solid payment history.
As with any truly important aspiration, achieving good business credit does not happen overnight. However, hard work can go a long way toward giving you the results you desire. Once your business credit is established, you’ll begin to see the benefits: better interest rates and credit terms from lenders, more favorable payment relationships with your venders, and a reduced need to pre-pay for the things you need. In short, solid business credit is precisely the embossed, gold-stamped invitation you need to get into the exclusive club of successful, stable business owners.