As a shrewd consumer, you most likely have a fair idea about managing your credit. However, as a new business owner, you might not yet have the capacity to establish business credit. Your credit score will not come in handy if you require business financing at any point in time. Instead, a strong business credit history will be needed. Business credit performs the same function as personal credit by measuring trustworthiness. The credit bureaus collect information from vendors, banks, and other business partners to measure your solvency and allot you a score which, unlike a personal credit score, ranges from 0 – 100.
Why Business Credit is so Important
Just as the strength of your credit score determines the kind of credit products you are eligible for and their terms and conditions, a business credit score is a vital component in measuring your métier as a business. Your business partners want to see a reliable track record in terms of payments and other financial handlings. The credit score allows them to make informed decisions about your business. Therefore, a good credit score can open up the doors to inexpensive and enduring credit in the future.
Ways to Establish Business Credit
Establish a Business Entity
As mentioned before, your aim should be to reflect your payment history on your business accounts rather than personal ones. Therefore it needs to be a separate and registered entity. Your purpose should be to identify the entity that offers you the best solution regarding your needs and creditworthiness. The two most common options are sole proprietorship and partnerships, as they are easier to manage at the start. However, these entities are independent.
If you have chosen a sole proprietorship or partnership, it will be hard for you to differentiate and establish business credit as a separate entity. Both structures do not specifically distinguish an individual and the business. Therefore, it is unable to help you in developing business credit.
The proper structures for establishing business credit are a ‘C Corporation,’ ‘S Corporation,’ or an ‘LLC’ (Limited Liability Corporation). While it’s essential to think of a structure that suits your need to build credit, it is not the only thing that matters as the right business structure depends on many other factors.
Get a Federal Tax ID
The IRS relies on an employer identification number (EIN) to observe businesses, especially queries related to employee payroll expenses. Every business must get this number as it performs a variety of essential functions and establishes business credit at the same time. You will be required to apply with your state or county government office.
Establish a Dedicated Business Address and Phone Number
While it may sound pretty simple, setting a dedicated office for your business and a landline establishes your credibility, which eventually positively affects your credit score. You will register with business directories and just listed gets a few points added to your credit report. A phone line can establish business credit by developing a formal trade credit relationship with your vendors and other business acquaintances, a good sign for credit companies.
Institute Trade Lines with Suppliers
Maintaining good relations with only a handful of vendors and suppliers is good for your credit score. However, to enhance it, you must develop good credit relations with a variety of business partners. As your small business grows, you will be able to procure from many different suppliers that will open up multiple tradelines for you. It will be even better if your partners extend credit and allow you to pay after weeks or months as this shows their trust in you, which is excellent to establish business credit.
As a small business owner, you must realize that building credit will take time and, if you get the basics right, you will rise the ranks past your competition. Pay off your business loans and bills in time and follow the guidelines above to ensure that you are on the right credit building track.About Complete Controller® – America’s Bookkeeping Experts Complete Controller is the Nation’s Leader in virtual bookkeeping, providing service to businesses and households alike. Utilizing Complete Controller’s technology, clients gain access to a cloud-hosted desktop where their entire team and tax accountant may access the QuickBooks™️ file, critical financial documents, and back-office tools in an efficient and secure environment. Complete Controller’s team of certified US-based accounting professionals provide bookkeeping, record storage, performance reporting, and controller services including training, cash-flow management, budgeting and forecasting, process and controls advisement, and bill-pay. With flat-rate service plans, Complete Controller is the most cost-effective expert accounting solution for business, family-office, trusts, and households of any size or complexity.