If you’re a small business owner, we’re going to look at how you can build your business credit and why it’s essential to keep personal and business credit histories separate.
Why Separate Your Credit Histories?
Keeping your credit histories and lines of credit between personal and business separate is vital so that something negative in one area won’t impact the other. For example, if you have a few late payments in your personal credit history, that shouldn’t affect your business credit that you’ve worked hard to establish.
How To Build Business Credit
The first step towards building business credit is to incorporate your business.
With a sole proprietorship, the business is essentially the owner in the legal sense, and there isn’t a separation between personal and business credit history. When you incorporate or form an LLC, you create a company that’s legally separate from the owner.
The next thing to consider is to get a federal tax identification number or EIN. Think of this number as the social security number for your business, and one that you need for tax purposes. Also, you must have this number if you want to open a bank account in your corporation’s name.
Once you have your EIN, open a bank account specifically for the business in the legal business name.
After you have this account set up, make sure to pay all business transactions from that account, and if you use a business credit card, pay the credit card bill from that bank account too.
Another thing you want to do to help establish your business credit is to get a phone line attached to the business’ name, whether it’s a landline, cell phone, or VoIP. Make sure the phone number is under the business’s name instead of your own.
To establish credit, you’ll want to open a business credit file with the three major credit reporting agencies: Equifax, Experian, and TransUnion. Also, you’ll want to obtain credit cards in the name of the business, preferably one that reports to the above agencies.
Establishing credit with vendors is another way to help develop and build good business credit, and ask if they report to any of the credit reporting agencies.
Most importantly, pay your bills on time. Credit scores, be they personal or business, rely heavily on payment history. One late payment can tank your score, so be sure to pay on time all the time.
Why Do You Need Good Business Credit?
Much like personal credit, good business credit gives you purchasing power for upgrades and things you need to grow your business. Also, having good business credit reduces the number of times you’ll have to pre-pay for a product or service because, with good credit, vendors view you as trustworthy.
Lastly, good credit allows you to borrow money with better interest rates from lenders and banks, and it makes it easier to get additional lines of credit when you need it.
