It can be difficult for small business owners to get loans and lines of credit on favorable terms. Consequently, many opt to use personal credit. But it is important to keep personal credit separate from business credit in order to keep your credit history clean and clear of any business related debt. It is also important to build business credit to legitimize your company in order to attract potential lenders. And this is how you start:
1. Create a Legal Business Entity
The first step is to separate your business from its owner or owners. Consult a Certified Public Accountant to get advice on the type of legal structure that is best for your business. A corporation and a Limited Liability Company (LLC) are just two of the options. Your choice of entity can have a significant impact on your tax payments and the regulatory environment of your business, so choose wisely.
2. Get a Tax ID Number
Also known as an EIN (Employer Identification Number), it is just as important for a business as social security numbers are for people. You will apply for an EIN via the IRS website. Once you have this nine-digit number, you will be able to open up a bank account and create a credit profile for your business.
3. Open a Business Bank Account
Many banks will not approve your business for a loan unless your business bank account has been open for at least 2 years. So make sure to open a business bank account as soon as you obtain your EIN number. Your bank statement must show a cash flow that seems capable of handling a new business loan. The loan amount and the loan terms for which you are approved will depend largely on the average daily balance in your bank account.
4. Get Listed with a Business Credit Bureau and Tracking Agency
Experian, Equifax, Dun and Bradstreet, and Business Credit USA are the four most important business credit bureaus operating in the United States. When you apply for a credit card or loan on behalf of your business, your lender will ask for the credit file number at your Credit Bureau. Dun and Bradstreet and Experian are also the leading credit tracking companies. They make sure that all the transactions and payments undertaken by your company are truly reflected in your business credit report. This includes timely payments against on your business credit card.
Good business credit does take time to develop, but it is important to establish separate business credit to ensure that your business is well-equipped to face the challenges and growth opportunities that come its way in the future.
La Mancha Sims is the Founding Partner and CEO of Triton Business Group, Inc., a business funding consulting firm located in Decatur, Georgia. You can reach La Mancha at 770-249-2357.