Steps to Establish Your Business Credit for Any New Small Business

Getting business credit is an essential step for any new small business. It allows you to (1) retain a credit history separate from your personal credit history, (2) experience the business benefits of having good business credit, and (3) demonstrate a separation of ownership and business.

Why have separate credit histories?

If you’ve founded a limited liability company (LLC) or corporation for your small business, keeping your business credit history separate from your personal credit history can help reduce the impact of negative events on the other. For example, if you make financial mistakes that affect your personal credit history and score, they should not affect your small business credit provided you have a clear separation, and vice versa.

Why separate a business from its owners?

Unless you run your small business as a sole proprietorship or general partnership, you must demonstrate that the company is separate from the owners. One of the primary advantages that corporations and LLCs provide to their owners is the protection of personal assets. By consistently demonstrating a clear separation between the owners and the business, you can maintain this protection.

Eight steps to create your business credit.

1. Incorporate your business

Even if you may be incorporated as you read this, it is worth mentioning. Sole proprietorships and general partnerships are legal entities that share the same owner. As a result, corporate and personal credit histories cannot be separated. When a company is incorporated or formed as an LLC, it becomes legally separate from its owners.

2. Get an EIN

A company’s federal tax identification number, or EIN, is similar to its social security number. It is required to open a business bank account in the name of the corporation or LLC as well as on federal tax returns. To comply with IRS standards, many larger businesses require an EIN from their vendors to pay them for services provided.

3. Open a business bank account

Create a business checking account in your legal business name. Once opened, ensure that the business’s financial transactions are paid from that account. If you use a business credit card for a large number of financial transactions, make sure you pay the credit card bill from your business checking account.

4. Create a business phone number

Whether you utilize a landline, a cell phone, or VoIP, you should have a separate phone number for your business that is registered in your legal name. Include that number in the directory so it may be found.

5. Open a business credit file

Create a business credit file with all three business reporting agencies: Experian, Equifax, and TransUnion.

6. Get a business credit card(s)

Obtain at least one business credit card that is not associated with you or any other owners individually. Choose a business credit card from a company that reports to credit reporting agencies.

7. Create a line of credit with merchants or suppliers

Work with numerous vendors/suppliers (at least five, for example) to establish credit for your organization to use when making purchases from them. Instruct them to disclose your payment history to the credit reporting agencies.

8. Pay bills on time

Perhaps it should go saying, but make sure to pay your payments on time. Late payments have a bad influence on your business credit, just as they do on your personal credit.

Benefits of Having Good Business Credit

A small business can profit from having good business credit in a variety of ways, including:

Positioning your organization for better payment terms with new vendors and suppliers.
Reducing the number of times you’ll have to prepay for products or services purchased.
Allowing you to get better interest rates and credit terms from lenders and banks.
Once you’ve established good business credit, monitor and protect it just like you would your personal credit.