Business Credit Process
How to build business credit for a small business
Establishing business credit is an important step for any new small business. It helps you (1) maintain a credit history separate from your personal credit history, (2) experience the business benefits of having good business credit, and (3) demonstrate separation between the owners and the business.
Why separate credit histories?
If you have formed a limited liability company (LLC) or corporation for your small business, having a separate business credit history from your personal credit history can minimize the negative effect one could have on the other. For example, if you have some financial missteps that affect your personal credit history and score, they should not affect your small business credit if you have established a clear separation and vice versa.
Why separate a business from its owners?
Unless you are operating your small business as a sole proprietorship or general partnership, you must demonstrate that the business is separate from the owners. One of the key benefits that corporations and LLCs provide to owners is the protection of their personal assets. Maintain this protection by consistently showing a clear separation between the owners and the business.
Eight steps to establishing your business credit
1. Incorporate your business
While you may be incorporated by the time you are reading this, it deserves a mention. With sole proprietorships and general partnerships, the business is legally the same as the owner. Therefore, there can be no separation between business and personal credit history. Incorporating a business or forming an LLC creates a business that is legally separate from the owners.
2. Obtain an EIN
An EIN (federal tax identification number) is basically a social security number for a business. It is required on federal tax returns and is also required to open a business bank account in the name of the corporation or LLC. To comply with IRS requirements, many larger businesses also require an EIN from their vendors to pay them for services rendered.
3. Open a business bank account
Open a business checking account in the legal business name. Once opened, be sure to pay business financial transactions from that account. If you use a business credit card (see below) for many financial transactions, be sure to pay the credit card bill from your business checking account.
4. Establish a business phone number
Whether you use a landline, cell phone, or VoIP, have a separate number for your business and in the legal name of your business. List that number in the directory so it can be found.
5. Open a business credit file
Open a business credit file with the three business reporting agencies: Experian, Equifax, and TransUnion.
6. Obtain business credit card(s)
Obtain at least one business credit card that is not tied to you or any other owner personally. Choose a business credit card from a company that reports to credit reporting agencies.
7. Establish a line of credit with vendors or suppliers.
Work with several vendors or suppliers (at least five, for example) to build credit for your company to use when shopping with them. Ask them to report your payment history to credit reporting agencies.
8. Pay your bills on time
It may go without saying, but be sure to pay your bills on time. As with your personal credit, late payments will negatively affect your business credit.
Benefits of having a good business credit
Having good business credit can provide a number of benefits to a small business, including
- Positioning your business for more favorable payment terms with new vendors and suppliers
- Reducing the number of times you will need to pay upfront for products or services purchased
- Allowing you to obtain better interest rates and credit terms from lenders and banks
Once you have established good business credit, be sure to monitor and protect it, just as you do your personal credit.