How to establish business credit
Knowing what is on your business credit report is the first step to building a score
How to build credit for your business
Your business credit score can be as important as your personal credit score. Creditors and suppliers are increasingly using business credit reports and scores to make lending and credit decisions.
Establishing a business credit profile and building a score may seem like a daunting process—especially if your business is new. But it’s not.
There are several steps you can take to begin building business credit:
Incorporate or form an LLC (Limited Liability Company) to ensure your company is seen as a separate business entity
Make sure you choose the best business structure for your company from the very beginning. It’s possible to change it later, but it can be a costly mistake. Whatever structure you choose, the key is to keep your business and its finances separate from your own personal ones.
Forming a separate business entity, such as an LLC or sole proprietorship, can protect your personal assets from business liabilities, significantly reducing personal financial risks. It can also simplify tax reporting and can offer tax benefits, but it requires adherence to more complex legal and financial regulations. Check with an attorney or financial advisor if you need help deciding what’s the best fit for your business.
Obtain a federal Employer Identification Number
An Employer Identification Number (EIN) is a unique nine-digit number assigned by the IRS to businesses operating in the United States for identification purposes. It's an absolute must for businesses of all sizes, including sole proprietors, as it is required for tax reporting, opening a business bank account, and hiring employees.
It's important to understand that an EIN is different from a Social Security Number (SSN). While your SSN is used for individual identification and tax purposes, an EIN is specifically for business-related activities, ensuring a clear separation between personal and business finances and obligations.
To obtain an EIN, business owners can apply online at the official IRS website, which offers a straightforward and free application process.
Open business bank accounts in your legal business name
Maintaining a business bank account that is totally separate from your personal account not only helps you be organized by keeping business and personal transactions separate, it also simplifies tax preparation, potentially maximizing tax deductions related to your business expenses.
Various types of business bank accounts, including checking accounts, savings accounts, and merchant services accounts, cater to different needs. For instance, checking accounts facilitate daily operations, savings accounts help in managing profits, and merchant services accounts are essential for processing customer payments.
To select the best type of account(s) and the best financial institution for your business, do research online, but also consider talking to local banks in your area. If you’re happy with the bank where you have your personal accounts, see if they offer business services. Having a good relationship with a bank can help in the future if you decide to apply for loans, too.
Set up a dedicated business phone line in your business name and make sure it's listed
Establishing a dedicated business phone line, whether a cell phone or landline, and ensuring it's listed boosts your professional image and enhances communication with clients. This not only strengthens your credibility but also improves visibility in directories and online, aiding in marketing efforts.
It helps identify and legitimize your business, which can mean your business credit is established more quickly. Finally, having a separate work phone helps you maintain boundaries between your personal and professional life, contributing to work-life balance.
Once you've completed the steps above, you can request business credit in your company name. Your business trades are then reported to Experian, creating a robust business credit report that gives lenders and suppliers quality information about your company. This improves your ability to obtain loans, increase credit lines, and secure more favorable credit terms.
Wondering if you already have a business credit report? Want to know your score now? Check your Experian business credit report today to find out. Start by searching for your business with our free look-up tool.
If your business has recently been formed or is unable to be found after conducting a search, you can submit a request to establish your business profile. You will be alerted by Experian when the report is available.
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Guide: The Blueprint - How To Establish and Build Business Credit
- Marketing Your Business
- Mailing Lists
- Data Appending Services
- Sales Leads
- Check Your Customers' Credit
- Check Business Credit
- Check Customer Credit
- Tenant Screening
- Debt Collection For Small Business
- Debt Collection Software
- Skip Tracing
Introduction
Are you a small business owner needing to navigate the complexities of business credit? Experian is here with a helpful guide about business credit and how it works to help you on your journey. From understanding how business credit scores and reports are originated, to employing best practices for building up a strong business credit report, the Experian Blueprint is here to assist you every step of the way.
Good financial health is essential to the success of any business, and building a solid credit reputation establishes trust with lenders. To ensure continued growth and stability, it’s crucial that entrepreneurs understand their company’s payment obligations and manage their business’ score accordingly. Although personal credit can often grow organically over time, businesses must take proactive steps to cultivate an exceptional rating — so let’s study what’s involved.
Business Credit and Borrowing
A small business often needs an additional source of funding not just to survive, but thrive and grow. Whether it’s bridging the gap between seasons, covering an unpaid bill or investing in a new product — extra cash can be crucial for success. But where does that money come from? Uncovering appropriate sources is key to any sound financial strategy and helps ensure your company keeps progressing forward on its financial journey.
Having lenders review your business credit is a necessary step in securing funding for any venture. To best prepare, it’s important to create an individualized metaphorical “prenuptial” agreement between you and your business: establishing separate personal and corporate accounts. This precautionary measure will help reduce risk when the time comes to pursue financing opportunities.
Establish your business credit in three steps.
Step One: Plan
Establishing a business entity
The most important starting step for establishing a business credit report and score for your business is getting established as a business entity. This starts the transactional history of the business in the eyes of the state and any creditors you do business with. Establishing a business entity is the process of creating a separate legal entity for your business, which can have its own assets, liabilities, and financials.
The following are the steps
to establish a business entity:
1. Choose a business structure
Choose the type of business entity that best fits your business needs, such as a sole proprietorship, partnership, limited liability company (LLC), corporation, or nonprofit. Each structure has its own registration requirements and tax implications.
2. File the necessary documents
File the appropriate formation documents, such as articles of incorporation or a certificate of formation, with the state government.
3. Select a business name
Choose a unique business name that complies with state regulations and is not already in use by another business. Whether or not you have structured as a sole proprietorship, you may want to register a fictitious business name (also known as a doing-business-as name), typically done at the state, county, or local level. This will allow you to accept financial transactions and bank with that name.
4. Obtain any necessary licenses and permits
Depending on your business type and location, you may need to obtain licenses and permits from local, state, or federal agencies.
5. Obtain an Employer Identification Number (EIN)
An EIN is a unique number assigned to your business for tax purposes. One can be obtained even if you have chosen to structure as a sole proprietor. You can apply for an EIN through the IRS website.
6. Register for taxes
Register for the appropriate federal and state taxes, such as sales tax, income tax, and employment taxes.
7. Set up a registered agent
Designate a registered agent who will receive legal and tax documents on behalf of your business. This would typically be done when you register a business structure with the state.
8. Create an operating agreement
If you have established an LLC, create an operating agreement to set the rules and guidelines for your business operations.
9. Open a business bank account
Separate your personal finances from your business finances by opening a separate business bank account.
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Keep your business and personal credit affairs separate
A good practice early on in your business is setting up a firewall between your personal and business finances. This creates a solid foundation for the business from a financial standpoint.
There are many advantages to doing this:
Legal protection
Keeping business credit separate from personal credit can provide legal protection for the owner’s personal assets in the event that the business is sued or faces financial difficulties.
Improved credibility
Having a separate business credit score and history can demonstrate the stability and success of the business, improving its credibility with lenders and suppliers.
Better loan terms
By maintaining a strong business credit score, a small business owner may be able to secure better loan terms, such as lower interest rates and larger loan amounts, than if they used personal credit.
Increased flexibility
Keeping business credit separate allows a small business owner to have more control over their finances and makes it easier to manage cash flow, taxes, and other financial responsibilities.
Easier to manage
Having separate credit reports for the business and personal finances makes it easier to monitor and manage the credit history and score of each, helping to avoid potential issues.
By establishing a solid business credit foundation, business owners can safeguard themselves from the potential financial damages of missed payments.
