Establishing business credit is an important step for any new small business. It helps you to (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 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 business credit history separate from your personal one 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 shouldn’t impact your small business credit if you have established a clear separation and vice versa.
Why separate a business from the owners?
Unless you’re operating your small business as a sole proprietorship or general partnership, you need to demonstrate that the business is separate from the owners. One of the key benefits that corporations and LLCs provide the owners is protection of their personal assets. Keep this protection in place by consistently showing clear separation between the owners and the business.
Eight steps to establishing your business credit
1. Incorporate your business
Even though you may be incorporated when you’re 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 of business credit history from personal. Incorporating a business or forming an LLC creates a business that is legally separate from the owner(s).
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 filings and is also required to open a business bank account in the name of the corporation or LLC. In order to comply with IRS requirements, many larger businesses also require an EIN from their vendors in order to pay them for services provided.
3. Open a business bank account
Open a business checking account in the legal business name. Once open, be sure to pay the financial transactions of the business 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 you use VoIP, have a separate number for your business and in your business’ legal name. List that number in the directory so it can be found.
5. Open a business credit file
Open a business credit file with all three business reporting agencies: Experian, Equifax, and TransUnion.
6. Obtain business credit card(s)
Obtain at least one business credit card that is not linked to you or any other owners personally. Pick a business credit card from a company that reports to the credit reporting agencies.
7. Establish a line of credit with vendors or suppliers
Work with multiple vendors/or suppliers (at least five for example) to create credit for your company to use when purchasing with them. Ask them to report your payment history to the credit reporting agencies.
8. Pay your bills on time
Perhaps it should go unsaid, but be sure to pay your bills on time. Like with your personal credit, late payments will negatively impact your business credit.
Benefits of having good business credit
Having good business credit can provide a number of benefits to a small business, including
- Positioning your company for more favorable payment terms with new vendors and suppliers
- Reducing the number of times you’ll 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 good business credit, be sure to monitor and protect it, just as you do with your personal credit.
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