Business credit can be challenging to build, so it helps to come up with a battle plan from the outset
Dear Your Business Credit,
I need your advice on establishing business credit. — Steven
Business credit can be challenging to build, so it helps to come up with a battle plan from the outset. Use these three steps as a checklist to make sure you have the credit you need to build a business.
1. Start with your personal credit. If you are new to running a business, you may be surprised to discover you must almost always give a personal guarantee to get a business loan. Even though it’s your company that’s borrowing the money, the bank will want to make sure that if the business flops, someone will still pay off the loan. You are that lucky someone.
What if you haven’t built much personal credit or have some dings on your credit report? Then your first step should be to build the highest credit score you can. For some tips you can use right away, read 8 legitimate ways to improve your credit score now.
2. Open a business checking account. Many business owners start out using their personal money to open a business, but if you are serious about running it for a while, you should open a business checking account. Your bank will probably ask for a federal Employer Identification Number (EIN) and want you to show official documents proving that you incorporated the business or formed an LLC, as part of its plan to comply with the USA Patriot Act’s requirements that it verify who is opening each bank account.
The USA Patriot Act of 2001, passed to disable terrorist networks, changed the way banks are required to handle checking, savings and loan accounts. It includes an anti-money-laundering provision that requires each bank to come up with a “customer identification program” to verify the identity of people opening bank accounts. For many banks, that program includes asking customers who open a business bank account to provide information such as the business’s full name and address and its EIN, as well as the name and address of the individual opening the account. The banker will ask for documents that show that the person opening the account can legally conduct financial transactions for the business.
Once you open your checking account, make sure you keep it well funded and balance the account regularly. Keeping a very low balance or making mistakes like bouncing checks will not help win the confidence of lenders.
3. Apply for a small-business credit card. Once your business has steady cash flow, applying for a credit card you use only for business can help you establish separate credit for the company. Often, small-business cards offer attractive perks for common business purchases, such as rewards points for purchases of office supplies or gasoline, so shop around for one that suits your purchasing patterns.
One of the most common questions people send me is whether they can get a business credit card with no personal guarantee. The answer is probably not. Generally, banks will only offer cards without a personal guarantee to a more mature, established business. However, if you have done the work to build strong personal credit, it should not be hard to get a business credit card. Even if the credit limit is low at first, it will give you an opportunity to build business credit.
Take it slow on spending. Many small-business owners charge too much on their business credit cards when they are just starting up, without understanding how long it may take them to begin generating revenue or get paid by clients. In the early days of your business, limit the purchases you make on your card to absolute necessities, so you never run into a situation where you can’t pay the monthly bill on time.
Once you build a track record of timely payments, you’ll find that more credit becomes available to you — and often at lower interest rates. This approach takes patience, but it will help you build a stronger business in the long run.