How to Establish Small Business Credit

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One of the biggest mistakes new small business owners make is that they commingle their personal and business finances and credit. It is understandable; new entrepreneurs often use personal credit cards or bank accounts to set up the business, and then they just get lazy or sloppy and never change over.

The problem with that is that real businesses, professional businesses, are run separate and apart from the owner. That is one reason for incorporating. Creating separate business credit is another essential part of this process. Unlike personal credit, business credit can help you secure business loans and credit cards, negotiate better terms with suppliers, and protect your personal assets.

Here then, is a step-by-step guide to help you get started.

Step 1. Choose the right business structure

Establishing separate business credit begins with selecting the proper legal structure. There are many ways to structure your new business, but only a few of those will serve this purpose.

Creating your new business as a sole proprietorship or partnership will not fly because they are not legally considered entities that are separate and apart from the owner. (And did you know that 99.9% of all businesses in the U.S. are small businesses?)

Only corporations and limited liability companies (LLCs) are. Therefore, in order to create separate business credit, you need to set your business up as an S corp, a C corp, or an LLC. This separation ensures that your business can build its own credit profile.

Step 2. Obtain an Employer Identification Number (EIN)

Once you have your corporation or LLC in place, the next step is to obtain an Employer Identification Number (EIN) from the federal government, specifically the IRS. This number is akin to a Social Security number for your business, allowing you to open a business bank account, file taxes, and establish business credit. Applying for an EIN is a straightforward process that can be completed online in just a few minutes.

Step 3. Open a business bank account

Armed with a corporation and its EIN, it is now time to open a business bank account . This account will be in the name of the new business only.

The purpose of this account, aside from a business necessity, is to maintain a clear separation between your personal and business finances. This is what lenders and creditors will want to see.

Step 4. Register with credit reporting agencies

To build business credit, commercial credit reporting agencies must know about your new EIN. Therefore, Step 4 is registering your new entity with agencies like Dun & Bradstreet, Experian Business, and Equifax Business.

Also, be sure to obtain a DUNS number from Dun & Bradstreet, which is often required by lenders and suppliers to assess your creditworthiness. Once registered, your business will begin to generate a credit profile.

5. Establish trade lines

The problem now is that your new business still has no credit. You begin to rectify this by establishing what are known as trade lines of credit. Open your new accounts in the name of the business and the EIN with suppliers and vendors that report to credit bureaus. These trade lines can be with wholesalers, office supply companies, utilities, or phone or internet service providers.

6. Open a business credit card

This is key, as business credit cards can be a valuable tool for establishing even more credit. And credit card issuers should be keen to offer your new business at least a low balance credit card.

Just be sure to look for cards that report to business credit bureaus. You then use the card for business-related purchases. Once you pay the balance in full each month you will really be on the road to establishing business credit.

7. Monitor your credit

Once you have gone through these steps, maintaining and growing your business credit profile is quite similar to what you normally do with your personal credit profile. Use your new credit wisely, pay bills on time, monitor odd activity, be on the lookout for errors, and all and all, nurture it.

Do all that, and within, say, a year, you will have rockin' business credit and will be well on your way to getting some fantastic offers for additional credit.

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