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Building business credit

April 26, 2013

In my last column, I discussed the why checking and cleaning up your personal credit report is so important to your business, especially since so many small business people have not separated their business and personal credit. And that’s really too bad, because comingling personal and business credit can have disastrous consequences for both.

Think about it. If you and your business are one in the same, as is the case for countless entrepreneurs, you put all of your personal assets and credit at risk if something should go wrong down at the shop. And vice versa. If you personally get sued and your business is not legally different than you, your business becomes an asset that creditors can go after.

So why don’t more small business owners create a separate business credit profile? The likely answer is because many don’t know how. We all basically know how personal credit works and how to build a positive credit history: Pay your bills on time, take on some credit card debt and pay it back. Get a car loan. Pay it back. You know the drill.

But business credit often seems like a mystery for many small businesses. But it shouldn’t be. The process of getting business credit is not really all that different than building your own personal credit profile.
Here’s how:

  1. Incorporate: The essential first step in building business credit is, as I have indicated, to separate yourself from your business, and you do that by incorporating. A corporation is a separate legal entity, distinct and apart from you. A sole proprietorship is not a corporation, nor is a partnership. If either of those are your form of business, you would need to change to an S corp, a C corp, or a limited liability company (LLC.)  Because a corporation or LLC is a separate legal entity, it is the easiest way to begin to create business credit apart from you.
  2. Get an Employer Identification Number (EIN). Think of an EIN as the social security number for your business. Issued by the IRS, an EIN identifies your business for tax and credit purposes. If you don’t have an EIN, get one here from the IRS. Again, having one allows you to detach your social security number from your business’ credit profile.
  3. Get a DUNS number. Dun & Bradstreet is the main purveyor of business credit information. Its system of following your business is the DUNS number and thus by getting one, you allow D & B to create a credit profile of your business.
  4. Open up a checking account in the name of your business: Using your EIN and DUNS number, go to your bank and open up a checking account. 
  5. Also open up a business savings account. I will explain why in a moment, but suffice to say that it will help you to establish credit if you have a business savings account.
  6. Get commercial credit: Whatever business credit accounts you have – phone, Internet, bottled water, whatever – put those accounts in the name of the business, again, using your EIN and DUNS number for identification. See if any of your vendors will do the same.  Getting commercial credit is an easy way to begin creating business credit. 
  7. Get a loan: This is where the business savings account comes into play. Although you do not have business credit yet, you do have a savings account in the name of the business. Take out a small loan and use the savings account as collateral, as security for the loan. Once a bank gives your business a loan, you really begin to establish a separate business credit profile.
  8. Pay on time: Repay all of this credit on time, and in full.

Before long, you personal credit will be personal and your business credit will be business, and that is as it should be.

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