HOW TO BUILD BUSINESS CREDIT FOR YOUR START UP
Are you using credit to help finance your new business venture?
You’re not alone as statistics show that over 65% off all business owners use credit for business purchases. But what’s alarming, is that only 50% of those cards are actually in the business’ name.
As a business owner using personal credit cards for business is a risky approach since you assume total liability and if your company is sued or fails you risk losing personal assets and good credit ratings as well.
So how do you go about building credit in the company’s name without putting your personal credit on the line?
For starters, if you operate as a sole proprietorship you’ll need to incorporate your business and obtain a Federal Tax Identification number.
As a corporation your company is treated as a separate being with its own tax registration with the IRS and state agencies. It files its own tax returns and it can also create its own credit files completely separate from that of its owners.
Your company’s Tax ID Number or Employer Identification Number is the number that you will use to get registered with the business credit bureaus like Dun and Bradstreet.
You will also be required to furnish this number on corporate credit applications because lenders use this information to conduct a business credit check on your company.
Before you start to apply for credit make sure your corporate records, state filings and required business licenses are all up to date. In addition, get your company’s phone number listed in the 411 directory so a supplier or lender can complete every aspect of its verification during the underwriting process.
After you meet these requirements you will be ready to apply for credit and the best place to start is with suppliers. Many types of suppliers, including major brands, extend lines of credit to businesses like yours giving you the opportunity to finance purchases and conserve your company’s cash.
You can obtain products like office supplies, computers and marketing materials with payment terms ranging from net 30 to net 60 days.
You should focus on applying for credit with suppliers that provide products and/or services your company needs in order to make regular purchases using your credit line. By paying invoices on time you will build business credit history and increase your company’s creditworthiness.
With a strong business credit report you can stop relying on your personal credit to qualify for the financing your company needs. Since a creditor, lender or supplier can now easily determine your company’s risk level with a business credit check qualifying will be a much easier process.
As a startup I know it can be tempting for you to decide on operating your business as a sole proprietorship and using your personal credit to fund your business simply because it’s one of the easiest structures to create and you already have the cards on hand.
But by building business credit for your start up, you can improve your company’s image, protect your personal credit, limit your liability and increase your credit capacity since businesses can obtain 10 to 100 times greater financing then an individual.