Establishing business credit can be an important factor for many new and growing businesses.
When you’re in the beginning stages of starting a business and want to open a credit card or other credit account for your business, it is very common for lenders to require a personal guaranty for the debt. Since the business is new and doesn’t have any established account or credit history, they want to make sure they’ll be able to collect from you if the business goes under.
But as your business grows and your credit needs go up, you’ll want to be able to demonstrate to lenders that your business can carry the burden, and they shouldn’t look to your individual credit to determine the business’s creditworthiness. That’s where business credit comes in.
“Wait, I thought your business and personal credit was the exact same thing?”
Thankfully, it isn’t. Ideally, your credit would be completely separate from your business’s credit so that changes to one will not impact the other. If you make a few mistakes that impact your personal credit (been there, unfortunately!), it shouldn’t affect your business’s credit, and vice versa.
Establishing and maintaining business credit can also be a factor in piercing the corporate veil and the separateness of your business and its owners. But don’t start freaking out if you have yet to establish business credit; it is unlikely that this one factor, on its own, would be the straw that breaks the camels back and makes you personally liable for business debt. But being able to demonstrate that thebusiness has an established credit history that is unattached and unrelated to your credit couldpotentially work to your favor someday.
“Okay so how do I get business credit?”
Here are a few tips for establishing, building, or improving your business credit.
Start with your personal credit.
The most important factor when you’re trying to establish credit for a new business is your own personal credit history. For new businesses, lenders will often look to the business owner’s personal credit history. If you have a bad credit score, bad debt, a history of late payments, etc., this is going to negatively affect your ability to get credit for your business. In fact, many lenders will require a personal guaranty if the business doesn’t have a decent credit or financial history. So do what you can to improve your personal credit while you’re starting your business and working on your business credit. It can be particularly challenging for minorities, immigrants, and women to establish credit and obtain funding for a new business. So if building credit is important to your business, make sure your personal credit looks good first.
Much like personal credit, the length of credit history is going to impact your business’s credit. If you can (and want to) open a business credit card or open a tradeline with suppliers, do it as soon as you can. There are a lot of options for obtaining credit as a new business. Having a long history of available credit and on-time payments is going to have a positive impact on your business’s credit.
Form an entity if you haven’t already.
A really important step in establishing business credit is …well…establishing a business. If you’re operating as a sole proprietor or general partnership, all debt of the business will be your debt anyway. Not many ways around it. So if you haven’t already, establish the biz as an LLC or corporation that will be a separate entity with its own credit history.
Get an EIN.
This is like the business’s social security number. You’ll need an EIN to open a new business bank account and any credit cards or other accounts, if you choose to do so. You’ll also report your taxes to the IRS using the EIN.
Open a business credit file.
Many of the major credit bureaus such as Equifax, Experian, and Transunion allow you to research the credit history of a business much in the same way you would research your own credit score and credit report. However, businesses aren’t entitled to the same information as individuals when it comes to credit reporting. As individuals, we’re entitled to one free credit report every year, for example. Businesses will typically have to pay a fee to pull their own credit history. It is worth it to check the credit bureaus to see if a credit history exists for your business, or to start a credit file if it doesn’t. This way, lenders, vendors, suppliers, etc., can report your payment information to the bureaus to start building that credit file.
Apply for a DUNS number.
Though it won’t be beneficial for all businesses, some may benefit from applying for a DUNS number through Dun & Bradstreet. Like the credit reporting bureaus, many lenders and suppliers will report your payment history to Dun & Bradstreet.
Get a business credit card.
Opening a credit card account for your business is an easy way to start building your business’s credit. (That is assuming, of course, that you are responsible with credit cards.)
Open a line of credit with a vendor.
If you prefer to stay away from credit cards, you can try to establish a credit account with a supplier or vendor. If you go this route, ask the vendor to report your payments to D&B and/or the credit bureaus so it will have a positive impact on the business’s credit history.
Pay Bills on Time.
Nothing can damage your credit much like missed and late payments. Even if you do not have a credit card, loan, or other credit lines, it is important that you have a history of on-time payments with all of your other bills. Being able to show lenders that you have a history of on-time payments, even if it just for your utility bills or service providers, is going to help you to establish business credit.
Business credit may not seem important in the beginning, especially if you are in a position where you do not need to rely on debt. But even if you don’t need it now, there may come a time when it would be beneficial for your business to leverage some debt, such as getting a loan to purchase new equipment, grow your team, etc. Having good business credit will allow you to obtain lower interest loans, better credit cards, and more favorable terms with your suppliers. So once your business becomes multi-million status (claim it!) and you need that private jet to pick me up in Denver (wink, wink) and go anywhere we like, your business’s stellar credit will certainly come in handy.
It’s always a great idea to consult with an experienced attorney when starting a new business. If you’re in Colorado and are looking for help with your new business, check out our flat-fee packages and schedule your Discovery Call now to get started.