It is important that if you run a business that you also build your business credit separately from your personal credit.
Your business credit rating can help you obtain new credit and keep your personal affairs apart from your business activity. There are several steps you can take to build and maintain your business credit.
Step No. 1: Choose Your Business Structure
Structure your business to reflect the type of business arrangement that is right for you. An accountant or an attorney can help you here.
If your business name is not registered with your state, do so now. Then choose one of four business structures that match what you do: C-Corp, S-Corp, limited liability company (LLC), or nonprofit.
An LLC is the newest type of business, what limits your personal liability as you run your business. An LLC takes the best of two other corporate structures: a limited partnership and a corporation. The advantage for business owners here is that LLCs are not taxed at the business level. Instead, taxes “pass through” to your personal taxes.
Both C-Corps and S-Corps offer distinct tax advantages and disadvantages. With a C-Corp, you can enjoy full liability protection, but you also expose yourself to double taxation at the corporate level and through dividends paid to shareholders. With an S-Corp, taxes are passed through just as they are with an LLC and are also paid by each shareholder on their personal income tax returns.
Choose a nonprofit tax arrangement only if you have obtained a 501c(3) rating from the IRS. Typically, nonprofits are limited to houses of worships, other religious organizations, and some community organizations.
Step No. 2: Notify the Credit Bureaus
Once your business structure is established, notify the credit bureaus of the same. Unlike personal credit where your financial information is readily forwarded to Experian, Trans Union, and Equifax, your business information may not get to the right sources. If that’s the case, you’ll have a hard time obtaining business credit.
All three consumer credit reporting bureaus maintain information about your business as does Dun & Bradstreet, and some smaller enterprises. Contact the four larger bureaus and give them your business name and Employer Identification Number (EIN). Like your Social Security Number, your EIN will help the credit bureaus track your business.
Step No. 3: Evaluate Your Credit Reports
Now that your credit information is with the credit bureaus, you must never assume that this information is complete. Or accurate. Just as you can do with your consumer credit reports, you should obtain copies of your business credit reports and review the same.
Unlike the consumer reports, you’ll have to pay for this service. Contact each credit reporting bureau and ask for a copy. Pay the appropriate fees and evaluate your reports. Make sure that the information about your business is accurate and up-to-date. If there are errors, notify the respective bureau to have corrections made. Review your reports annually and obtain your business credit regularly too.
Step No. 4 Apply for Business Credit
With your business credit information in the hands of the credit bureaus, apply for credit. The easiest credit to get is typically a line of credit, representing unsecured debt that may be tapped as you need it.
The logical first place to go is to your bank. You should have separate checking accounts for your business and personal needs; the bank where your business checking is done may be interested in offering you a business credit line. Meet with a branch manager to discuss your options including equipment and vehicle loans, real estate loans, accounts receivable loans, and loans for construction and land development.
As you have read here, there is much about business credit that parallels what you do with your personal credit. Never supply your personal information when applying for business credit, make your payments on time, and use your business phone and business email accounts for your contact information.
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