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Your Business Credit

Using an EIN to apply for a card, build business credit

Summary

A small business can start building credit with a home improvement store credit card, but be sure you’re doing it for the right reasons

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Dear Your Business Credit,
How can I use my EIN to get a Home Depot card or a Lowe’s card? I need help with my business. — Kwan

Dear Kwan,
Opening a small-business credit card through a home improvement store can be a great way to start building a credit history for your business that is separate from your own. It can also help you take advantage of sales on frequently used supplies.

You already have one piece of the puzzle — the Employer Identification Number you need to apply for a card.  The Internal Revenue Service issues EINs to people who have a principal business located in the United States or U.S. territories, and even lets you apply online.

Both stores’ applications for business credit cards require an EIN or, if you don’t have an EIN, a Social Security number with a personal guarantee. They each state that this is required under the Patriot Act.

It’s not clear from their application forms if, at some later point in the process, you will also need to provide a Social Security number, so you might want to have that information handy, too.

Once you’ve built up a solid track record of using your home improvement store card, I would recommend that you apply for a general small-business credit card, too. There may be business purchases you need to make at other types of stores. By putting small charges on a small-business card and paying them off on time every month, you will be able to add to your business’s credit history.

You mentioned you need help with your business. I’m assuming that you mean you need credit to pay for purchases at Home Depot or Lowe’s to improve your cash flow. If you work in construction and need to buy supplies long before customers pay you, using credit at the store can be a smart practice — as long as you pay off the balance when you finally do get paid.

If, instead, you mean you are seeking credit to pay for things you can’t currently afford, I would strongly encourage you to hold off on buying them until you can. That is different from using a credit card to improve cash flow — where an owner knows how much money will be arriving from clients in the near future and limits his spending to what he knows he can pay down.

Charging things you can’t afford with insufficient income projected to pay it off can lead to financial trouble. It is much better to fund your business purchases out of revenue from the business — even if that means making purchases more slowly than planned.

My email inbox is filled with questions from small-business owners who borrowed on credit cards to pay for business purchases and are now struggling to pay down the balance, years after the business has closed. Often, there are no ways to escape that debt, other than actually paying it, negotiating a settlement or filing for bankruptcy protection. That is a tough situation and you don’t want to run the risk of having it happen to you.

I’m not trying to cause you undue fear. Credit can be a great tool to grow a small business, but you have to be conscious of how you use it. Start out slowly with your home improvement store card and you’ll end up in good financial shape.

See related: Business and personal expenses better on separate cardsCredit utilization important for buisnesses, too

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