As a wise 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 a reliable payment and other financial handling track record. 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
While establishing business credit may seem arduous for a start-up, here are some ways to do that without much hassle.
Establish a Business Entity
As mentioned, 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 initially. However, these entities are independent.
If you have chosen a sole proprietorship or partnership, it will be hard to differentiate and establish business credit as a separate entity. Both structures do not specifically distinguish an individual and a 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 proper 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 various essential functions and establishes business credit simultaneously. 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 up 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; 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 suits your credit score. However, you must develop good credit relations with various business partners to enhance it. As your small business grows, you can 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 for establishing business credit.
Conclusion
As a small business owner, you have the power to build your credit score over time. By prioritizing the fundamentals, you can surpass your competitors and achieve financial success. Keep in mind that paying off your business loans and bills promptly is crucial, and following the tips outlined above will ensure you stay on the right path. With determination and discipline, you can confidently establish a solid credit history for your business. Complete Controller has your back too! Check out our blog and learn even more about building your business credit and more!
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