Introduction:
Starting a small business is an exciting endeavor, but it’s important to establish strong business credit along the way. Building business credit has several advantages: it allows you to maintain a separate credit history from your personal one, reap the benefits of good business credit, and demonstrate a clear separation between the business and its owners. In this article, we will discuss the steps to building business credit and the benefits it can bring to your small business.
Why Separate Credit Histories?
If you have formed a limited liability company (LLC) or a corporation for your small business, having a separate business credit history is crucial. By keeping your personal and business credit histories separate, you can minimize the impact of negative events on one another. For instance, if your personal credit history is affected by financial missteps, it won’t affect your business credit if you have established a clear separation, and vice versa.
Why Separate a Business from the Owners?
Unless your small business operates as a sole proprietorship or general partnership, it’s important to demonstrate that the business is separate from its owners. One of the key benefits that corporations and LLCs provide their owners is the protection of personal assets. To maintain this protection, it is essential to consistently show a clear separation between the owners and the business.
Eight Steps to Establishing Your Business Credit
1. Incorporate Your Business
If you haven’t already done so, incorporating your business or forming an LLC is the first step towards building business credit. This creates a legal separation between the business and its owner(s), allowing for a distinct credit history.
2. Obtain an EIN
An EIN (federal tax identification number) is like a social security number for your business. It is required for federal tax filings and opening a business bank account in the name of your corporation or LLC. Some larger businesses may also require an EIN from their vendors to comply with IRS requirements.
3. Open a Business Bank Account
Open a business checking account in the legal name of your business. Ensure that all financial transactions are conducted through this account. If you use a business credit card, be sure to pay the credit card bill from your business checking account.
4. Establish a Business Phone Number
Having a separate business phone number, whether it’s a landline, cell phone, or VoIP, is important for establishing credibility. Make sure it is listed in directories so that clients can easily reach you.
5. Open a Business Credit File
Open a business credit file with all three major business reporting agencies: Experian, Equifax, and TransUnion. This will allow your business to have a credit history that can be evaluated by potential lenders and suppliers.
6. Obtain Business Credit Card(s)
Obtain at least one business credit card that is not linked to you personally or any other owners. Choose a credit card from a company that reports to the credit reporting agencies, as this will help establish your business credit history.
7. Establish a Line of Credit with Vendors or Suppliers
Work with multiple vendors or suppliers and request credit terms for your company’s purchases. Aim to establish credit with at least five vendors or suppliers. Ask them to report your payment history to the credit reporting agencies, which will further enhance your business credit.
8. Pay Your Bills on Time
As with personal credit, it is crucial to pay your business bills on time. Late payments can have a negative impact on your business credit. Consistently meeting payment deadlines will demonstrate your financial responsibility and improve your creditworthiness.
Benefits of Having Good Business Credit
Having a strong business credit history comes with numerous benefits for your small business, including:
- Positioning your company for more favorable payment terms with new vendors and suppliers.
- Reducing the need for prepayment when purchasing products or services.
- Obtaining better interest rates and credit terms from lenders and banks.
Once you have established good business credit, it is essential to monitor and protect it, just as you would with your personal credit.
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