If you currently have a business or you are considering starting a business, establishing business credit is a good idea. According to the National Association of Credit Management (NACM) small business owners should take steps to establish credit in the name of their business as a way to preserve cash flow for necessary business operations, purchases, and rental payments. Here are a few basics to begin building business credit.
Separate Your Business Credit from Personal Credit
Business credit can and should be established separate from personal credit. When business owners use their personal credit to obtain business credit, they run the risk of lowering their personal credit scores. The business owner also risks being personally responsible for business liabilities. If you file bankruptcy and your personal and business credit are one in the same, you stand to lose everything. Business credit protects your personal assets.
No Personal Guarantees
The most important element to establishing business credit is finding lending institutions, credit card issuers and vendors that will establish business credit without you giving a personal guarantee. A personal guarantee involves using your personal credit information to guarantee repayment of the debt incurred by the business. In other words, you are obligating yourself to be 100% responsible for the business debt. It may be your intention to fully repay any debt incurred by the business; however, obligating your personal and business assets to repaying business debts can lead to financial ruin if any business setbacks occur.
Business Structure
Doing business as a sole proprietor will not allow you to distinguish your business credit from your personal credit. As a sole proprietor you may be “doing business as”; however, you are not a separate business entity. In order to establish business credit without a personal guarantee you must structure your business as a separate legal entity such as a corporation or limited liability company. Even if you have been doing business as a sole proprietor for years, you can restructure your business into a separate legal entity. Besides, it is a better choice to set your business up as an entity separate and apart from you. Your business could get sued and if all of your assets are tied together, financial ruin may be lurking in the background. Having a separate entity protects your personal assets.
Tax Identification Numbers
Your business entity must have an Employer Identification Number (EIN) also known as a Federal Tax Identification Number (Tax ID). The EIN is your permanent number and can be used immediately for most of your business needs, including opening a bank account, applying for business licenses and establishing a business credit file. Never use your social security number. It may also be necessary to establish a State tax identification number. For the federal tax identification number you can apply online at www.irs.gov. The application process is fairly simple and you can receive the EIN immediately.
Business Checking Account
Your business entity should have at least one bank account, in the name of the business, that can be used as a bank reference. The older the bank account, the better. Having a business checking account helps in establishing your business identity and reputation. Banking relationships are still important in the business world. Building a strong relationship with your bank can be of assistance when you begin to seek business financing.
Get a Business License
You must always register your business and obtain a business license in the State, County or City where you conduct business. For some reason, this is not always done by businesses. It should be at the top of your “to do” list. Always register your business in the jurisdiction where you conduct business.