Is your new business looking to get off the ground or expand? The trick for any new business owner is to find a way to get business credit either by a loan or credit card. In order to get that business credit, you should follow these important steps.
1. Separate yourself from your business. In the first instance, make your business a separate entity from you. You should never merge any funds, debts, and legal names between you and your business. The most common way to effectuate a dividing line between the business and you is to incorporate or become a limited liability corporation. Having a sole proprietorship is not a way to separate you from the business and operating as a sole proprietor just creates more overlap between you and your business. The goal of separating the business is for two principal reasons-to avoid liability but to establish credit for the business.
2. Get an employer identification number. Once you have incorporated, you can get this number from the IRS.
3. Contact your local banker and open up two accounts. The first account should be a corporate checking account and the second account should be a personal savings account as in the form of a certificate of deposit.
4. Open a business account. This account should be in the name of the company and should be paid with company checks or credit cards.
5. Establish a business phone number. Whether you have a landline or cell phone you must have a separate number for your business. It is another way of building credibility with the outside world.
6. Open a business credit file. This is simply a matter of alerting the three main credit bureaus Experian, Equifax, and TransUnion that you are now in existence. Each bureau has a different formula for calculating scores and different lenders report different types of data. Dun and Bradstreet allow businesses to update basic credit information. Many companies use Dun and Bradstreet for business information and credit risk analysis. A strong rating in this index will give your business higher credibility when applying for business credit cards without having to enter into any personal guarantees. As far as Dun and Bradstreet are concerned, it offers a "Paydex" score which measures past payment history. Getting a high Paydex score can be established even by utilizing relationships with small vendors which can then be utilized as trade references.
7. Obtain business credit cards. Choose a credit card that links to the three credit reporting agencies. As with personal credit, your credit utilization is a key component in how your business credit score is calculated. Be sure to only utilize no more than 30% of the credit limit at any given time.
8. Establish a line of credit with vendors and suppliers. To ensure that you maximize this opportunity it is best to work with at least 5 vendors and suppliers in order to create credit. Lines of credit with vendors and suppliers can later turn into trade references for your business. The more trade references your business has the higher a Paydex score you will achieve which will inevitably lead to more abundant credit for your company.
9. Paying bills on time always helps. This is a key component in the credit score which, in turn, generates more business credit. Borrow from lenders that report to the credit bureaus.
Establishing a solid credit history from the very inception of your business tends to weigh favorably so the earlier your business can start establishing business credit, the better. Building good business credit can assist your company to get lower interest rates small business loans, business credit cards, and better terms for your suppliers all of which will get your business moving a positive direction. Good credit can also lead to better trade references and thereby attract new customers since an increasing credit score is a way for other businesses to gauge your company's trustworthiness. At the Katz Law Group, we can help your business reach its full credit potential. Give us a call at 508-480-8202.