5 Steps to Building a Robust Business Credit Profile
This is the best time in history for starting and running a small business, as governments and private lenders are letting people borrow money for the most part at the best interest rates anyone has ever seen. All that’s left to you is to make sure you place your business in the best position possible for success in this endeavor. To this end, building a small business credit profile is a great place to start.
Tip #1: Understand the Different Ways to Incorporate Your Business
How you incorporate has some important tax and credit history implications. For example, if you want your personal credit history to be the same as that of your business, then look into the general partnership classification or the sole proprietorship. When you go this route, your business entity is basically treated the same as your own person in the eyes of the law, financiers and the companies and people you do business with.
If, on the other hand, you want to incorporate as a limited liability company, referred to in the US as an LLC, then the relevant credit histories will be separate, and you’ll have different credit profiles for yourself and your business. All of the above ways to incorporate your business have their disadvantages and their advantages. Consider carefully which path is right for you and your company.
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Tip #2: Get a Government Identification Number For Your Business
In the US, a government-issued identification number for businesses is officially called the Employer Identification Number, or EIN. It is the equivalent of a Social Security number, except that it’s an ID for businesses, not individuals. Companies you do business with will request your business’s EIN. Additionally, the EIN is essential for tax purposes. You’ll also need it to establish business credit and open a bank account with the name of your business on it.
Tip #3: Establish Your Business Credit
There are three major credit reporting bureaus, all of which have their own methods of collecting information as pertains to your creditworthiness.
Unless you have decided to incorporate as a partnership or sole proprietor, go online and navigate to the websites of Experian, TransUnion and Equifax so you can start establishing business credit. Once you do that, you can also apply for one of the numerous business cards that send reports to credit agencies. Make sure that the credit card is actually for your business and not for any individual, including you.
Tip #4: Use Your Government ID to Open Lines of Business Credit
You should open up lines of business credit with a handful of vendors and suppliers that you routinely purchase from. Once you’ve done that, pay the balances down regularly in line with their accounting requirements. This practice will help your business establish a robust credit history. That’s because these suppliers will report the financial aspects of your business to the credit bureaus.
Tip #5: Be Disciplined with Payments
Be diligent about making payments on time to vendors and suppliers. Doing so is even more important than it is with your personal credit history. The reputation of your business depends on the credit history your business establishes. Further, your business credit history affects your business’s ability to conduct future business with lenders at favorable rates.
A Final Note
Of course, you should also separate your personal phone number from your business number. Doing so will further establish your business as a legal entity unto its own. Even if your business is a sole proprietorship or partnership your business should have its own phone number. You want to be able to separate your office hours from the rest of your life—even if you’re a workaholic.