How to establish solid and separate business credit
byAugust 13, 2015
If you are like most of us, funding your new business was probably not an easy thing. Most startup entrepreneurs cobble together funds from a variety of sources and even then may not get all the money that their business plan calls for. The usual suspects include
- Their own savings
- Friends and family
- Bank loans
- Credit cards
Then, generally speaking, things tend to level out. The business begins to earn a consistent profit and establish accounts receivables which can then be leveraged (via factoring or a line of credit for example.)
Yet one thing that is often a missing piece of the financial puzzle, even at that later stage, is that because the enterprise was begun using the founder’s personal credit (to secure loans, or due to using his or her credit cards for instance), the business never really did set up a separate business credit profile. And the problem with that is that the lack of business credit will (note we said “will” and not “may”) severely hamper the business’ ability to get loans, take credit cards, thrive, and become bigger and more successful.
As they say, and rightly so, it takes money to make money, and thus if you don’t have access to business credit you will never have the money you need initially in order to make even more money down the road.
And way to do that is to create a separate legal entity, separate your personal and business credit, and to then build your business credit profile (much as you did with your personal credit profile.)
- Incorporate: Many small businesses start out, legally, as sole proprietorships. Sole proprietorships are nice because they are easy and inexpensive to create. Get a business license, hang out a shingle, and away you go. The problem however is that you and the business are one in the same. If the business gets sued, it is you personally who is on the hook.
The thing to do then is to incorporate in some form. A corporation is a separate legal entity that has many benefits, including 1) it is the one on the hook financially and legally, and 2) it can and should have its own credit profile.
Yours could be a Limited Liability Company (a LLC), a C corporation, or an S corporation. This decision needs to be made with your own lawyer and accountant.
- Get an Employer ID Number (EIN): As with a Social Security number for people, your corporation’s EIN identifies your business for tax and other purposes. A separate EIN is a credit signal that the entity is different than the owner. You can learn more here.
- Set up a bank account in the business’ name: Next, go to your bank and create a checking and savings account in the name of the corporation and using the business’ EIN. Another good marker.
- Get a DUNS Number: A DUNS Number is issued by Dun & Bradstreet and is one of the basic ways that business credit is monitored. You can get one here.
- Get some business credit: Using your corporate name, EIN, and DUNS number, apply for credit. Maybe your bank will give you a small secured loan. Maybe an office supply company will give you a small line of credit. Whatever the case, apply for and get some credit using your new credit profile. Yes, you will likely have to start small, but soon – once your business borrows money and shows creditors and credit reporting agencies that it will be repaid on time – your new business credit profile will take root.
Then you can really begin to grow the dream.
USA TODAY, Small Business Columnist
Author, The Small Business Bible