As a consumer, you most likely have an idea about managing your personal credit. However, as a new business owner, you might not have the capacity to establish business credit. Your personal credit score will not assist you if you require business financing at any point in time. Instead, a strong business credit history will be needed.
Business credit performs the same function as personal credit by measuring trustworthiness. Credit bureaus collect information from vendors, banks, and other business partners to measure your solvency and allot you a score which, unlike a personal credit score, ranges from 0 – 100.
Importance of Business CreditJust as the strength of your personal credit score determines the kind of credit products you are eligible for and their terms and conditions, a business credit score is a vital component in measuring your métier as a business. Your business partners want to see a reliable track record of payments and other financial handlings. Your business credit score allows them to make informed decisions about your business; therefore, a good credit score can open the doors to positive and enduring credit in the future.
Establishing Business CreditWhile establishing business credit may seem difficult for a start-up, here are some ways to do that without much hassle.
Establish a Business EntityAs mentioned before, your aim should be to reflect your payment history on your business accounts rather than personal ones. Therefore, it needs to be a separate and registered entity. Your aim should be to identify the entity that offers you the best solution for your needs and creditworthiness.
The two most common options are sole proprietorship and partnerships, as they are easier to manage at the start. However, these entities are independent. If you have chosen a sole proprietorship or partnership, it may be hard for you to differentiate and establish business credit as a separate entity. Both structures do not specifically distinguish between an individual and the business. Therefore, it is unable to help you in developing business credit.
The proper structures for establishing business credit are a ‘C Corporation,’ ‘S Corporation’ or an ‘LLC’ (Limited Liability Corporation). While it is important to think of a structure that suits your need to build credit, it is not the only thing that matters because the right business structure depends on many other factors.
Obtain a Federal Tax IDThe Internal Revenue Service (IRS) relies on an employer identification number (EIN) to monitor businesses, especially queries related to employee payroll expenses. Every business must get this number as it performs a variety of essential functions and establishes business credit at the same time. You will be required to apply with your state or county government office.
Establish a Dedicated Business Address and Phone NumberWhile it may sound simple, setting a dedicated office for your business along with a landline establishes your credibility, which eventually has a positive effect on your credit score. You will be able to register with business directories, and being listed can add a few points to your credit report. A phone line can establish business credit by developing a formal trade credit relationship with your vendors and other business acquaintances, which is regarded as a good sign by credit companies.
Institute Trade Lines with SuppliersMaintaining good relations with only a handful of vendors and suppliers is good for your credit score. However, to really enhance it, you must develop good credit relations with a variety of business partners. As your small business grows, you will be able to engage with many different suppliers that will open multiple tradelines for you. It will also be beneficial if your partners extend credit and allow you to pay after weeks or months as this shows their trust in you, which is great to establish business credit.
ConclusionAs a small business owner, you must realize that building credit will take time and, if you get the basics right, you will be competitive in your industry. Pay off your business loans and bills on time and follow the guidelines above to ensure that you are on the right credit-building track.