Many people are familiar with building their personal credit. Building your credit score is important for many things – buying a house, leasing a car, applying for a loan, or better car insurance rates. But many business owners forget how important it is to build business credit.
Building credit is extremely important in creating a successful company, especially with a startup. Businesses can secure 10-100 times more financing than a person could with their own personal line of credit.
It is important to build business credit to improve the trust and credibility with banks and financial institutions. By separating your business and personal credit, you can reduce the risk of one negatively impacting the other.
What is Business Credit?
Business credit is credit obtained by a business. However, it’s important to understand that business credit and personal credit are not measured on the same credit system.
Business credit can be used to ensure funding and increase the business owner’s borrowing power.
How Do I Use Business Credit?
Business credit can be used for all of your business’ needs. This could include office chairs, technology, equipment, etc. Companies who build their business credit can depend on funding in case of an emergency or if there is a decrease in overall sales.
How Do I Build Business Credit?
There are several steps you can take to establish credit for your business:
- Form an LLC – “LLC” stands for Limited Liability Company. The business owner and the actual company should be two completely separate entities. When you form an LLC, your personal credit and your business credit will be separate as well.
- Acquire an EIN – In a previous article, we discussed how to acquire an Employer Identification Number (or EIN). This is basically a Social Security Number for your business. An EIN for a business is required for federal tax filing and when attempting to open a bank account in the name of the LLC.
- Open a Business Bank Account – Once a business owner has obtained your EIN, they can open a business bank account. It is important to open the bank account under the legal business name (and not the business owner’s name). All of the purchases you make within your business should come straight from this checking account.
- Create a Business Phone Number/Direct Line – Lenders will want to see the company’s business phone number listed. Creating a phone number or direct line will help lenders and suppliers verify that you are a credible business.
- Acquire a Business Credit Card – Not only is it important to open a credit card, but it is essential for you to pay the bill on time. Essentially, this will increase your business credit score. Paying late will negatively impact your business credit. However, do not link this business credit card to the business owner or his/her personal accounts.
- Establish Lines of Credit – You will want to establish lines of credit with your suppliers when you purchase products or services from them. Report your payment history to the credit reporting agencies (think Experian and Equifax). The trust and credibility of your company will increase with the financial institutions.