Precision Corporate Services

Business Credit 101

Posted on Wednesday, July 27th, 2011 at 4:35 pm.

1. Set Up a Business Entity

---

There’s no such thing as a business loan or business credit for a sole proprietor — that’s a personal loan. In order to receive a business loan or investment, you must separate the business from its personal owners by setting up a legal business entity — a corporation or LLC, for example. Your CPA can advise you on the best legal structure for your particular situation, as your choice in entity can have some pretty significant tax implications.

---

2. Get a Tax ID Number (EIN)

---

Every business must have a tax ID number, just like each individual has a social security number. The Tax ID number (or EIN) is a nine-digit number assigned by the IRS to business entities operating in the U.S. You’ll use this number to open your business bank account and build your business credit profile. Apply for your business’ EIN online through the IRS site — and don’t worry, the process is fast and simple.

---

3. Establish a Business Bank Account

---

Your business needs at least one bank reference. Ideally, if you need to apply for a loan, your bank account will be at least two years old (of course, there’s not much you can do to change this situation other than apply for a business bank account as early as possible). More important than your account’s lifespan, your business bank account should show a cash flow capable of taking on a business debt. Of course, the optimum average daily balance of your account will depend on your type of business and the amount of financing you’ll be seeking.

---

4. Get Listed with the Business Credit Bureaus

---

Dun & Bradstreet is one of the main business credit bureaus and runs its own business credit score. D&B gives businesses a separate credit file number (known as a D&B or DUNS number) that rates your credit profile. Go to their site to find out if your business is already listed and has a score. You can also begin the process by applying for a free DUNS number once you’ve established your business entity and have your EIN. The number is how lenders will determine your business’ credit worthiness (most business credit card and lending companies will ask for your D&B number during the application process).

---

5. Establish Business Credit History

---

Check if your trade vendors are reporting your payment history to one of the major reporting companies, like D&B. Just like with your personal credit score, the more vendors that report a good payment history, the better your business credit will be. It’s common that small trade vendors won’t report your payment history to D&B. In this case, you should compile a trade reference sheet with at least three references (include their name, contact information and credit limits) to augment your official business credit report. In addition, you should open a business credit card (in the name of the business) and use it wisely — meaning keep your balance low and always pay on time.

---

6. Maintain a Good Personal Credit Rating

---

When you’re a relatively new or small company, creditors are going to be looking at the personal credit of the person who owns the business (or any shareholders with more than 20% ownership of the company). In today’s lending environment, you should expect to be asked to sign a personal guarantee on any kind of loan or credit of the business. This isn’t always mandatory, but it has recently become common practice in the lending industry. As a result, anyone with a 20% or higher share in the company should keep a close eye on his own credit rating.

The most important thing to remember is that you can’t build business credit overnight. Business owners should think about their business credit from day one. Even if you’re self-funded now, you never know what challenges or growth opportunities will develop down the road. Having access to credit can only help you adapt to changing conditions and position yourself for success.

Contact us today and request a free consultation with one of our Business Credit Advisers, let us show you how to get on the right path. 1-888-656-1293

Tags: business credit, establish a business bank account, establish business credit history, get a tax id number, get listed with the business credit bureaus, maintain a good personal credit rating, precision corporate services, set up a business entity, small business advice