Many startup owners take out a personal loan to fund their businesses upon starting. While this is a good decision, there are also other ways to fund your business without assuming debt yourself. This is because for small businesses, especially startups, their credit score has not been fully established as they are still at the startup stage.
As a startup owner, you need to fully separate your business’s credit score from your personal one if you want to build credit for your business. You can do that by obtaining a Federal Tax ID and by selecting the entity structure of your business. With a Federal Tax ID, your business will be able to register with business credit reporting agencies like Dun & Bradstreet.
By establishing a credit report for your business, you can enjoy a lot of benefits like lower interest rates and better repayment terms. How are you able to find loans if you haven’t established a good credit score yet?
Luckily for you, your business has several ways to establish a good credit score. But first, let’s delve deeper as to what business credit is and why your business needs to have one.
What is a business credit, and why is it important?
Business credit is an essential financing factor that enables one to take out a loan and other forms of financing to help keep business running or expanding. It’s also a helpful tool to establish a rapport with lenders and make connections with business-to-business lenders. Business credit can function as a bargaining and negotiating tool for lenders if you want to take out a loan, be it traditional loans or through online lenders, like CreditNinja.
Overall, the state of your business credit is an indication that your business is healthy and is in good condition to make deals with and be approved for different loan options. Arguably, your business credit’s biggest impact is on your business’s ability to obtain financing.
With bad business credit, your business would have a hard time taking advantage of various financing options, and this can be bad when your business needs help. It’s especially true for startups since they can’t stand on their own and need cash flow to stay afloat. Now that you know the importance of having good business credit, let’s discuss how to establish it efficiently, especially for startup owners.
Establish Your Business
The first step you should take to build business credit is to legally establish it as either a corporation, sole proprietorship, partnership, or limited liability. You can do this by creating a legal name and a contact number to give your business credibility among your fellow vendors and the government.
Once you’ve done creating your account, you now have Tax ID to obtain business credit, and you can then begin to build your credit from the ground up. Also, by having a Tax ID, you can request a credit report to various credit reporting agencies whenever you need.
But why should you get a Tax ID or EIN? Your EIN functions as a social security number for your business. Not only that, but even big companies have to create a separate EIN from their vendors so they can pay for their services.
Create a Bank Account
After you create an EIN, you need to create a bank account in your business’s name to begin to build your business credit. Your financial transactions will be channeled through your business account, with records that are easy to track and are automatically maintained. Having an active business account with a positive balance will help build your credit.
Choose a Lender that Reports to Credit Agencies Regularly
Some lenders don’t share payment data with credit agencies, which is a concern if you want to build good business credit. Some of them even send out incomplete data to business bureaus, which can harm your business credit.
So, choosing a trustworthy lender is essential in building business credit. Also, some lenders can offer a “credit-builder” loan for your business, which can help you build business credit slowly. You can even pressure them to send out multiple reports to several credit reporting agencies to make sure.
Building business credit is essential for your business transactions and financial life. With good business credit, you will be better able to secure financing and other transactions from lenders. Building business credit is a breeze by following the tips above.