Creating credit for your business follows the same basic concepts as creating personal credit. There are a few important differences that could make or break the financial success of your business in the future.
Steps to establishing business credit are as follows:
1. Incorporate your company, or form an LLC, to be represented as a separate business entity :
If your business is run as a sole proprietorship or general partnership, the business is legally the owner(s). To establish your company as a separate business entity, and distinguish business accounts and credit from your personal finances, incorporate your business or create an LLC. This is an important step to protect your financial liabilities.
2. Acquire a federal Employer/Tax ID Number (EIN) :
Your social security number serves as your identification for tax and credit purposes.An EIN is your business’s ID, and is used for federal tax filings andcreating business bank accounts. Obtaining an EIN is a simple process and can be done online from the IRS website.
3. Create a banking account(s), physical address, and phone number for your business, separate from any personal resources:
Credit scores are the quantitative way to create a professional reputation for your company, but creating a business address and phone number apart from your personal information represents your business in a corporate manner.
Keep personal and business funds separate to reduce your financial liability and risk. You can then manage your business budget and taxes more efficiently, and keep a clean and clear financial record for the IRS and creditors.
4. Establish lines of credit :
Three main ways to start creating business credit are business credit cards, loans, and lines of credit.
Credit Cards – For organizational purposes, having a designated business credit card separate from your personal accounts keeps accounts in order and resists the temptations to involve personal funds for your business. Credit card companies also report your financial history to credit bureaus, which is reviewed by future lenders. Proactively managing a business credit card account can improve your business credit score.
Business Loans – Small business loans are similar to personal loans; you borrow an amount of money and pay it back over time, with interest. Paying back loan payments on time will be reported to credit bureaus and is proof to future lenders of your business’s ability to handle loans properly.
Lines of Credit – A line of credit is created when your bank agrees to lend you a set amount of money based on your existing credit built by appropriately handling a business credit card and loan. Unlike a business loan, you are not required to borrow the funds right away. The resources will be available as a need arises, like a large company purchase. Your activities will also be recorded to credit bureaus for review by future lenders.
Remember, your personal credit can be affected by your business credit decisions. Creating and building credit is a learning process, but can be done with the help of this guide and, if necessary, a financial advisor. A clean and clear financial record is encouraging to lenders, suppliers, and customers that your business is responsible with finances and has good business credit.
To expand your knowledge about what credit is and why it is important for your business, please view Reputation is Everything: The Importance of Business Credit.
For further explanation on how to build and maintain successful credit scores, please view How to Build and Maintain Business Credit.
