Establishing Your Credit as a Small Business

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One of the most valuable things you can do to propel your small business to success is establishing credit. If you want the best rates, access to loans, and potential for partnership with prominent businesses, establishing credit is a must! Financing helps keep things moving in the world of business — even for small businesses.…

One of the most valuable things you can do to propel your small business to success is establishing credit.

If you want the best rates, access to loans, and potential for partnership with prominent businesses, establishing credit is a must!

Financing helps keep things moving in the world of business — even for small businesses.

Establishing your credit history as a small business, though, isn’t always easy and can cause a lot of frustration for business owners. Indeed, it can be difficult, and you may have to even put your personal credit on the line for your business.

Today, we’ll be providing you with four simple ways to establish credit for your small business, along with some frequently asked questions on the subject.

As you strive to build your credit as a business, here are some steps to follow:

1. Set Up a Business and Apply for an EIN

First, you need to realize that you won’t be able to establish business credit if you are a sole proprietor.

Instead, you will need to set up as a corporation or as an LLC.

Establishing yourself as an LLC or corporation can help protect you from legal liability and also provides some distinction between your personal finances and your business finances.

You have several options when it comes to formulating your company and its financial structure, a task you can complete yourself, with expert consultation, or through a company.

Sites like Legalzoom have plans starting at $159 a year to complete your initial incorporation paperwork. There are also annual fees which differ from state to state, usually a few hundred dollars a year.

While the cost might seem high for a newly-conceived business, it is well worth the protection and stability incorporating provides in the long run.

Once you have figured out a business structure (an accountant can be valuable in assessing your needs now, and the possibilities for the future), you need to apply for an Employer Identification Number from the IRS.

Your EIN is your tax ID that shows that you are reporting as a business. Additionally, you won’t be able to open a business bank account without one.

The application is free and can be completed online, via fax, or by mail.

To use the online application, you’ll need a valid Taxpayer Identification Number (Social Security Number, Employer Identification Number, or Individual Taxpayer Identification Number).

If everything is in order with your corporation or LLC, you can receive your EIN immediately with the online application, within 4 days via fax, and in a maximum 4 weeks via mail.

2. Open a Business Bank Account

Your next step is to open a business bank account. At the very least, business checking is a must. Establishing your business as a separate entity is important if you want to be able to eventually build your business credit.

Did you know that more than 65% of small business owners finance their ventures using credit? That’s according to recent research published by the U.S. Small Business Administration.

Of that 65%, only 50% of the credit cards are in the business’s name.

Damage to one account’s credit doesn’t have to harm the other on an equal scale. If your accounts are distinctly separate and you’ve made some mistakes leading to a poor personal credit score, your small business’ credit will be in far better shape than if the two are linked.

Conversely, if your business struggles and builds substantial debt, your personal finances can remain secure if you incorporate your LLC or business and separate accounts.

Realize, though, that many banks won’t consider lending your business money until you have had the account for at least two years. You will need to make sure your cash flow is obvious, and that it is clear that you can handle business debt.

3. Open a Business Credit File

Did you know there are also credit bureaus for businesses?

A strong business credit report is one of the most effective ways to prove your debt management skills and establish credit for your small business.

Let’s take a look at a few of your options for opening a business credit file:

  • Check credit agencies. These agencies constantly collect data on businesses, so you may already be on file. A quick search of their website should tell you.
  • Order a report. If you are listed, go ahead and get a report to have on file. Be sure to screen it for errors and keep records so mistakes can be easily amended.
  • Get your payments reported. If your search turns up no results, request that your lenders report your history with them to the credit bureaus.
  • Get a DUNS number. Dun & Bradstreet, one of the main business credit bureaus, issues what’s known as a DUNS number. Share it with vendors as you do business. When they report that you have made payments on time, it is reflected in your business credit report. A DUNS number is free; you just need to provide your EIN to receive it.

4. Build Your Credit History and Establish Trade References

Now that you have your business identity established, it’s time to work on building your credit history. One of the easiest ways to do this is with a business credit card. However, if you are just starting out, it might even be difficult to get a credit card in your business name.

You may have to rely on your personal credit to help you get a business credit card. If you speak with your banker about a business credit card at the bank where you have your business account, you might have more success.

Whether your personal credit is used or not, your credit card should be in the name of your business. It’s vital that your business credit is established separately.

Once you are able to obtain a business card, there are some excellent credit cards options for your small business. Many companies issue business credit cards primed for building credit and apt for your day-to-day needs.

Lots of business credit cards come with multiple cards for employees (free of charge), receipt saving features, and customizable categorization that helps you prepare for tax season.

Some also provide perks like roadside assistance, phone insurance, and purchase protection.

Keep building your credit and reap the rewards.

Finally, augment your business credit report with a trade reference sheet. Some small vendors may not report to Dun and Bradstreet.

So, list them out, with contact information and credit limits, and have it available to go with your “official” business credit report. That can help you show banks that you really do have a history of paying on time.

Frequently Asked Questions

Still have questions? Read on to see answers to some of the top questions associated with establishing small business credit.

Can you build business credit without personal credit?

  • It is absolutely possible to build good business credit with subpar personal credit. Like we said earlier, separating your personal and business accounts allows both to fail or succeed independently. Once you’ve followed all the steps above and established good credit for your business, you might qualify for financing on your business’s credit alone, no personal guarantee needed.

How do I register my business with the credit bureaus?

  • We told you how to find your credit reports and set up your DUNS. If your business isn’t on the list, you can also register it. To register with credit bureaus, you’ll need your DUNS number or EID. Experian, Business Credit USA, and Equifax are the main business credit bureaus. You’ll submit your business’ legal name and corporate address in the registration application.

Do you need to own a business to get a business credit card?

  • We’ve talked extensively about the benefits of owning an LLC or corporation, but what if you’re still in the planning process and want to work towards building credit now? A small business that you run by yourself is referred to as a sole proprietorship. Applying for a small business credit card does not require an EIN. All you need to apply is your Social Security Number.

What banks offer secured business credit cards?

  • While multiple banks offer secured credit cards for small business owners, we recommend the following for their benefits and security: OpenSky® Secured Visa® Credit Card, BBVA (formerly BBVA Compass) Business Secured Credit Card, Capital One® Secured Mastercard, Wells Fargo Business Secured Credit Card.

What is a good credit score for a business?

  • This whole article centers around good credit. But what is a good credit score for a small business? With credit scores, you want a high number to show your consistency in payments. On a scale of 0-100, Dun and Bradstreet considers a score of 80 or higher on its Paydex scale to be good. Similarly, Experian ranks a 76+ on its 0-100 scare as a good small business score.

What do you need to apply for a small business loan?

  • Lots of factors determine your likelihood of getting a small business loan. Obviously, credit is crucial. In addition to having a fantastic business credit score, you may need good personal credit as well, especially if your small business is new and you seek your loan from the SBA or a bank. The lender will also look at requisites like your  revenue and your business plan.

How do you open a business checking account?

  • Opening a checking account for your small business is fairly simple if you’ve properly established your small business. The main item you’ll need here is your Tax ID. To open your business account, you must register it with your Employer Identification Number. The EIN is the only IRS number that’s permissible here, so your social security number is unacceptable.

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About Miranda Marquit

Miranda Marquit is a freelance writer and professional blogger. She has contributed to, and been mentioned by, numerous financial web sites, including USA Today, The Huffington Post, The San Francisco Chronicle, The New York Times, Consumerist, The Atlantic Wire, The Wall Street Journal, The Washington Post, and other publications.

Her blog is Miranda Marquit.

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