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How to Establish Credit for Your Small Business

How to Establish Credit for Your Small Business

When you are launching a new business, you are right to focus on how you can make a profit. You research ways to make frugal purchases and to make the most of every dollar invested into your business. You are careful not to spend what you do not have.

However, one of the best ways to grow your company is with good business credit. How do you go about establishing a strong credit history for your small business? Here are seven steps to guide you in the process.

Separate Your Personal and Business Credit

Whether you are a sole proprietor or part of a partnership, it is wise to separate your personal credit history from your business credit. That way, you can avoid any possible negative impacts one may have on the other.

For example, if your business should fail or if your company is sued, you risk losing personal assets if your business and personal credits are aligned. Alternately, if you run into a personal financial crisis, you could put your business into jeopardy if the accounts are not separate.

Giving your business a name and incorporating your business or forming a limited liability company (LLC) will keep your business legally separate from its owner(s). As part of this process, you should obtain a federal tax identification number (EIN), which is required on federal tax forms.

You will use this number to register with business credit bureaus like Dun & Bradstreet. You also will provide this number on corporate credit applications so that lenders can conduct a business credit check on your company.

Open a Business Bank Account

Now, you can open a checking account in your legal business name. Pay all business-related financial transactions from this separate account.

Use a Business Phone Number

Having separate phone numbers, each with their own voice mail, for work and for personal communication conveys professionalism and allows you to achieve more of a work-life balance. It also helps simplify accounting and billing. Talk with your service provider about how you can have more than one number on your mobile phone.

Make sure your business number is listed in the 411 directory so your lenders can complete their verification during the underwriting process of your credit application – and so customers and clients can find you!

Establish a Line of Credit with Regular Vendors or Suppliers

Many suppliers extend lines of credit to small businesses that allow you to finance purchases and to conserve your company’s cash.

Work out a billing cycle with your vendors and suppliers to establish a credit history for your company. You can obtain office supplies and equipment at major retailers such as Staples or Office Max, for example, with payment terms ranging from net 30 to net 60 days. Ask these vendors to report your payment history to the three major credit-reporting agencies — Equifax, Experian and Trans Union.

Obtain a Business Credit Card(s)

Apply for at least one business credit card that is not linked to your personal account.

Pay Your Bills on Time

Once you have established business credit account, be sure to monitor it carefully and protect it. Pay all your bills on time, keep a low ratio of debt to available credit and keep any balances under 30 percent of the limit on your credit cards.

Once you have established a solid payment history, you can request an increased credit limit. It is a good idea to make this request before you need it. You can elevate your business credit profile by setting up a profile with Dun & Bradstreet, a business data and credit-reporting agency, for a small fee. By adding credit references, such as business suppliers with which you have a good payment record, you can elevate your business credit profile.

Here’s a final word. Traditional banks are not your only source for credit, Wright says. Other resources include asset-based lenders (focus more on your collaterals rather than on your credit history) factoring lenders (let you borrow against your accounts receivables), peer-to-peer lending and crowdfunding sites such as Indiegogo, Prosper and Kickstarter.

The use of these alternate channels is becoming more widespread and accepted. Also, by letting more people know about your business and its successes, you may be able to increase your chances of getting traditional credit in the future.

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by Tricia Drevets // Regular Contributor to Businessing Magazine. Tricia Drevets is a freelance writer who specializes in business and communication topics. A community college speech and theater instructor, Tricia lives in beautiful Southern Oregon.

Opinions expressed by contributors are their own.