One huge issue for a startup entrepreneur is obtaining credit to finance business growth. All companies need capital to market the business, make a product or provide a service. Without proper financing, a new business may quickly fail. Here are some tips to build business credit and protect the credit rating.
Business credit vs. personal credit
This article explains that both business and personal credit scores are based primarily on the same two issues. One issue is the number of credit inquiries and applications to obtain credit. The other is the number of loans and credit cards outstanding.
Avoid the mistake of using personal credit to finance business operations. By using personal credit, you’re increasing the number of inquiries and credit lines on your personal credit report. This process lowers your personal credit rating- and does not build a business credit history
Incorporate your business- from day one
To keep your personal and business transactions separate, look into incorporating your business before you start operations. Another article explains what type of business structure you should consider.
Forming a sole proprietorship or general partnership does not separate the business from the owner. With this type of structure, the business and the individual are the same. Instead, consider forming a corporation or limited liability company (LLC). These two businesses are considered legally separated from the owners. With a separate business, you can start to build business credit.
Once the entity is established, apply for an Employee Identification Number (EIN) through the IRS. An EIN is similar to a social security number that is assigned to individuals. The EIN identifies your separate business entity. Use the EIN number to open a business bank account, and consider getting a business credit card. Make sure you have a business license, if one is required. Your business should also have a separate phone line.
Business credit bureaus
Once you’ve set up your business, register with each business credit bureau. Like personal credit, there are several entities that report on credit ratings for businesses. When you approach companies about extending you business credit, make sure that they report your credit activity (amount of credit, payments) to each credit bureau. The process is voluntary- make sure that your creditor reports your information, so you can build a business credit history.
Plan your cash flow so that you can make timely payments on your loans. Those payments are an important indicator that you are a good credit risk for a lender.
Getting credit help when you need it
CreditRepair.com tweets about what to do when there are errors on your credit report and why this is important to those seeking credit help. A credit repair company can monitor the bureaus’ reporting and work to remove inaccurate information from your credit report. If, for example, a credit bureau lists late payment information that isn’t accurate, a credit repair firm can work to remove that information. Staying on top of your credit report can help you maintain a good business credit score.
Financing future growth
A good credit score will allow you to get financing to grow your business. When you need to add a second store location, or buy equipment, you’ll be able to get the financing in place. Use these tips to establish and maintain good business credit.