If you are an entrepreneur or an owner of a new business, at some point you will likely need to establish credit for your enterprise. Business credit differs from personal credit although initially, you may have used your personal credit to fund your company.
Knowing how to establish business credit is important if you want your business to thrive. To separate your business entity from your personal credit status, you will need to take some intentional steps that are outlined below.
Why This Is So Important
If you skip a credit card or personal loan payment on your own account, your credit will get dinged. But if you haven’t already separated your credit from the credit for your business, your company will be adversely affected by your late payments as well.
How to Establish Business Credit
You will first need to get an employer identification number (EIN) and register your company as a business entity. Also, get a specific telephone number that is used solely for your business.
Limited liability corporations (LLC) can be used to open bank accounts solely for your business. The business account should not be used for your personal transactions and you should have a completely separate set of books dedicated to its management.
Your Next Step
Once this has been done, you may want to open a line of credit, take out a small business loan, or get a credit card for your company. If you must choose between options, it is typically smarter to choose the business line of credit. The interest rates are nearly always lower, as APR rates for business credit card purchases typically soar upward from 20%.
Secured or Unsecured?
An unproven business entity is a poor risk to most lenders. They often insist on personal guarantees as collateral for the initial loan. That could be a piece of property like your family home but could be other forms of security as well.
Over time as your business proves it is credit-worthy, this need will diminish and likely be waived altogether.
Another Way to Build Your Business Credit
The easiest way to accrue business credit without saddling a fledgling business with a great deal of debt is to establish credit with your suppliers. As long as you pay your invoices promptly and do not get reported to credit bureaus for nonpayment, you are building credit for your business.
Want to Learn More About How to Establish Business Credit?
UTurn Management can help you establish the business credit you need to get your company moving along in the right direction.