We are currently in a series of blog posts designed to teach you about credit scores and how they might affect your business loan. Our goal with these articles is to show you how to be advantageous with your credit scores in order to make the best decisions financially for your small business.
Personal credit information is relatively common knowledge (although, if you would like an in-depth look at your credit score for business loans, see our first post in the series). But did you know that you could separate your personal finances from your business’ finances – and, in fact, that we highly recommend you do so?
In this post, we’ll go over seven steps to help you establish and build business credit. The first three steps cover how to establish your business, which, in turn, allows you to complete the remaining four steps of building business credit that is detached from your personal finances and personal credit score.
1. Establish Your Small Business as an Independent CompanyTo do this, you should form a separate business entity, such as, a limited liability company (LLC) or a corporation. This will give you liability protection and, most significantly, allow you to get out from under your own personal credit score. If you're not sure what kind of business to set up, make sure you consult with a lawyer to get proper guidance.
You can greatly endanger your personal credit score over time if you rely on it for business transactions, for a few reasons. First, the amount of debt that you can accumulate when you are establishing your business can look detrimental to credit bureaus if it’s tied to your personal score, especially if you end up with large outstanding balances. Additionally, if your business ever runs into trouble, you risk bringing your own credit down with the ship. It’s best to separate the two as early as possible to avoid the consequences of bad credit. Even if you have no concerns, it's always a good idea to keep an eye on your personal credit score– learn how to check your credit report and take a look at it on a regular basis.
2. Register Your Business with the IRS
Once you have established your company as an independent entity, you must obtain a Federal Tax ID Number, sometimes referred to as an Employer ID Number (EIN), from the IRS. This step is necessary because it guarantees that your business no longer operates under your social security number
3. Do Your Compliance Research and Understand Taxes, Local, State, and Federal Regulations
Ensure compliance with credit market requirements; understand your new taxation responsibilities; and research local, state, and federal regulations. There are several legal ramifications to establishing an independent business, and it’s important to research what specifically must be in place for your small business to be compliant with those legalities. If you are missing some of the necessary qualifications, you may find yourself unable to obtain business funding. For example:
- Some of the specifics you might encounter deal with the current business credit market, including obtaining proper licenses and establishing a business specific phone line, website, and email address.
- There are also regional regulations to comply with and a quick Google search can easily give you more insight into what’s required. For example, county websites usually provide several links detailing tax and licensing information, regulatory licensing, forms, etc, providing a launch point of information on local requirements.
- From there, each state will also have it’s own set of regulations. Information regarding business regulations in each state, such as additional tax requirements, employer information and other general resources, can be found here.
- There are also federal requirements you may need to incorporate; while not all businesses will, certain industries may require licenses or permits from the EPA or SEC, for example.
4. Research and Establish Lines of Credit for Your BusinessNow that your business is it’s own separate legal entity, you should begin to take tangible action to create separate finances; a good beginning step is to open a bank account in your business’s name. Don’t just stop with a bank account, though. One of the factors that credit bureaus assess on your credit report is whether or not you have a mix of credit, so you could also apply for a business credit card. Additionally, look into opening up lines of credit with vendors and suppliers.
It’s important that you do your research in this stage thoroughly. Since you’re in the process of separating your personal finances and credit score from your business transactions, you’ll want to try to find companies that do not require the use of your personal credit score to open the account. The goal is to establish a positive credit history so that eventually, when lenders do require a credit score, you will have built up enough business credit history to give them this information rather than your personal score.See also: How Credit Score Affects Getting a Business Loan
5. Establish and Maintain Good Relationships with Credit Bureaus
While building your credit history, ensure your transactions are being reported to the proper credit bureaus. Believe it or not, you could be taking the correct steps to develop your credit history for years, but if none of the transactions are reported to credit bureaus, ultimately they will not show up on your credit report. It's important to learn and understand how to build business credit.
- This is why the first step is to register your business on your own with the proper credit bureaus. No businesses are required to report transactions, so look out for your best interests here by doing some of the leg work yourself: register and report your transactions on your own. A few of the well-known credit bureaus you can establish a relationship with are Experian, Equifax, Dun & Bradstreet (D&B), and the Small Business Financial Exchange (SBFE).
- On the other hand, there are some businesses that voluntarily report transactions with the credit bureaus. Find out who these companies are in your particular field of work and establish relationships with them. They’ll be doing part of the work of building your business credit for you!
- On a side note, there are lenders who will want to see a business credit history of at least one or two years before they are willing to give you funding; therefore, it’s important that you begin the reporting process as soon as possible to achieve the creditworthy status you are seeking. Depending on the small business or government contractor, many lenders like StreetShares will take many aspects into consideration including your business credit, personal credit score, as well as revenues.
- Finally, make sure you keep your information current with the credit bureaus. Any moves or phone number changes (e.g.) should be updated properly so that communication does not get interrupted.
6. Manage Your Debt Aptly
This step is relatively straightforward. First, make all the minimum payments on any outstanding balances each month. Missing even one payment can be severely detrimental to your score. You don’t want to fall behind on what you owe, and you want to show that you’re capable of paying what you’ve agreed to. This will help you maintain a good score and greatly help increase a lower score.
Eliminate any other existing debt that you have in a timely manner. Having large outstanding balances will affect your score.
7. Monitor Your CreditYou don’t have to be obsessive, here; still, it’s good to have a ballpark estimate of your score from time to time. This will help you notice any errors more quickly and it will also encourage you to take the proper steps to increase your score as time passes. All in all, it’s good to know where you are and where there is room to improve. Learn how to check your business credit score here.
That’s it! Establishing business credit to eventually apply for a small business loan doesn’t have to be hard, but it will take time, so start right away if you haven’t already. Remember that building business credit is a process, and it starts with separating your personal finances from your business finances. StreetShares can help you get the business funding you need, and we can take your business credit score into account when analyzing how much we can lend; take these steps to maximize your scores today. Click here to get started with your loan application. To continue learning more about your personal and business credit scores, subscribe to our blog to get the credit score series straight to your inbox.
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