Many small business owners don’t realize they can establish credit that is separate from their personal credit history. Business credit can be a powerful tool in growing and sustaining a successful business. Add to that, the benefit of protecting personal credit from the potential negative credit experiences that may come about from business ownership. Combining business credit with the proper use of a limited liability company (LLC) filing, can offer some insulation between business and personal events that could be damaging. Let’s take a look at some of the steps you should take to get started on your own business credit.
When You Start…
Establish a business address and set up your business entity. It is recommended you incorporate your business before you open the doors. This is the first step in separating business and personal lives. Without at least an LLC in place, the owner and the business are legally one entity so it’s nearly impossible for the business to obtain it’s own separate credit standing. Immediately after setting up the LLC, you should obtain an EIN or federal tax ID number from the IRS at IRS.gov. This will allow you to provide a unique identity for the business to the government and banking/credit industry. Using your EIN number to establish bank accounts and other services instead of your social security number, helps establish business credit. The third step to take when you start is to set up a bank account specifically for business purposes. This helps protect the separation of personal and business assets and allows for credit reporting in the business name by the bank.
In Operations…
If at all possible, obtain a business credit card that is associated with your LLC and the bank account you have set up. Be sure this credit is reported to credit agencies. Along the same lines, try to establish credit lines with suppliers and vendors and ask them to report your activity to the credit agencies as well. If neither of these are possible, set up your utilities and other monthly expenses under the business name when possible. As the business grows, circle back to the credit card and line of credit if you were unable to get it at start-up. You should find that as the business matures, provided you have managed your finances well, it will be easier to obtain credit.
Maintaining Your Business Credit…
To get the most out of your efforts, make sure you have a business credit file established with Dunn and Bradstreet, Experian, Equifax and Transunion. They each have processes for set up and reporting so take the time to work through this with each of them. Of course, the obvious next thing to do is make sure you pay your bills in a timely manner. All the things that negatively impact your personal credit like late payments, skipped payments and charge-offs will have the same negative impact on your business credit if you allow them to happen in the business. Also, don’t forget to monitor your business credit by getting regular reports, just like you should be doing on your personal credit.
If you establish and maintain business credit properly, you will find it benefits you in many ways. It can lend credibility and reinforce strong relationships with potential vendors and clients. You may be able to swing better deals with suppliers when negotiating pricing and credit terms. Good credit can also save you from paying deposits and pre-paying for goods and services in some cases. Plus, your bank may be more willing to provide funding at better terms than you would otherwise get without business credit.
For more information and tips on starting and maintaining solid business credit, check out these online resources:
Small Business Right 