In the realm of the startup businesses, the ultimate goal is securing venture capital, yet for many startups bootstrapping is usually the reality. Moreover, self-financing emphasizes business credit. If you are an entrepreneur, navigating the lending environment today can feel like chasing your tail. Conventional lenders and investment banks are hesitant to lend until you have established yourself with a substantial credit history. However, the question then becomes; how can you establish good payment history if you are not able to secure funding in the first place? These restrictions from traditional lenders leave many business owners relying on their personal credit to build their businesses. Unfortunately, this signifies that all your personal debts such as personal credit cards, home loans, auto loan, and hospital bills could influence your eligibility to qualify for a business loan. Using business credit separates your personal accounts from your business's. Business credit is subject to payment history, assets, cash flow, and other financials. It does not include personal debts or other individual financial responsibilities aside from the business. Solid credit history is a basis for financial prosperity since it reduces your rates and can provide you access to additional capital when the need arises. Here are some tips to get you started on the path to establishing your business credit:
Register a business entity
To build up business credit, you first need to set up a business. Now you can run a business as a sole proprietor, but sole props use your personal credit and will have little to no effect on building your business credit. You need to isolate the business finances from your personal finances, and this involves establishing a legal business entity such as an LLC, S-Corp or C-Corp. Your CPA can guide you on the most suitable legal structure for your circumstance, as your choice legal structure can have some rather notable effects on your tax returns and payments.
Register a Tax ID (EIN) Number
A businesses TAX ID or EIN number is basically a social security number for businesses. This number that will be assigned by the IRS will be used to open your new business bank account and is the foundation for establishing your business credit profile. You can visit irs.gov to apply for your Tax ID number online.
Open a business bank account
Having an open business bank account is a requirement to build business credit. In many cases when applying for funding through traditional lenders, they require that your business account has been active for two or more years. It would be ideal to open a business account in the infancy stages of your new business and build it up to maintain a positive cash flow to show the business can afford the debt it is looking to secure.
Register with D&B ( Dunn & Bradstreet )
Dun & Bradstreet (D&B) is one of the main business credit bureaus and runs its business credit score. Built and managed by Dun & Bradstreet (D&B), your DUNS number is a unique nine-digit numerical identification number for every business registered with the program. Obtaining a DUNS number is not a legal requirement for any business entity but, it is a good idea to register in the early stages of building your business credit. A DUNS number will be required if you apply for an SBA loan and numerous vendors and government bureaus to require a DUNS number. You can apply for your DUNS number online at www.danb.com.
Establishing business credit
This is the catch 22; you need a credit history to build business credit but need credit to get credit extended, like your personal credit the more positive payment history the better the business credit score. When deciding on a vendor to work with on a credit basis, ask ahead of time if they report payment history to a business credit bureau. Some do, and some do not as a matter of practice but will if you specifically request it. Using a business credit card to manage the day in and day out operations of the business can be key to establishing your business credit. While opening new credit cards is not always desirable, opening a business credit card and paying the balance off at the end of the month ( On Time ) could be the most critical part of building your business credit score.
Sustain your personal credit score
As you are working to establish business credit for your company and separate your individual finances from your businesses, your credit score will still come into play. Especially in the early days, as the business owner, your personal credit will be a vital factor in securing financing for the business. If you are a relatively new or small company, don't be shocked when lenders require your credit report as part of their decision. Raising or sustaining a stable personal credit score should be viewed as a business priority. Entrepreneurs should be focusing on business credit from the start, even if your company is not currently looking for capital. Having access to credit can help support your company, during slow times and developing circumstances and set your business up for success.
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