As your entrepreneurial spirit shines through and you embark on your new venture, it is important to separate your business and personal credit. A mistake many new business owners make is using their personal credit to open lines of credit for their startup. Using your personal credit history can be problematic for several reasons. Not only will it increase the number of inquiries made to your personal credit profile, but it will also prevent your business from building its own credit.
Establish an Identity for Your Business
You need to register your business with state and local governments in order to begin building credit for the entity. A sole proprietorship can register in the form of a DBA (Doing Business As). However it may be more prudent to register as a Corporation or LLC (Limited Liability Company), which decreases the liability of the owner and adds more separation between business and personal finances.
Regardless of how you register your business, it is important to obtain an EIN (Employer Identification Number), which is like a social security number for your business. It is issued by the federal government. You should also apply for a DUNS number (Data Universal Numbering System). It is a nine-digit number developed and regulated by Dun & Bradstreet. A DUNS number is globally recognized and important if conducting business abroad. It is also a good idea to register your business with other business credit bureaus.
Building Credit for Your Business
Trade credit is when a vendor or supplier issues your business credit. It lets you buy goods or services now and pay later. Information about trade credit transactions is gathered by business credit bureaus to create your business credit report. In many cases, those issuing credit to you will rely on this report to determine if they want to extend credit and how much.
You need to understand the terms and conditions under which you must pay your suppliers. Payment is not always due in 30 days. A supplier may want their money sooner. If you see the phrase "net 10" on an invoice that means your payment is expected in 10 days. Others may give more than a month to pay. If your invoice says "net 60" you have 60 days. It is not mandatory for businesses to report payments to credit bureaus, so if you are looking to build your business credit you should know if a supplier you work with reports that data.
Opening credit card accounts under you business name not only helps your business build credit, but it also allows you to separate business and personal expenses. Many business credit cards offer options to track business expenses and can provide you with cards for employees.
Be sure to budget appropriately and pay your bills on time. Your Business Credit Paydex score, which is granted by Dun & Bradstreet, is determined solely by your payment history to your creditors. Once you have 5 creditors reporting you will receive a Paydex rating. Scores can range from 0 to 100. Most vendors and creditors would consider a 75 a good score. Keep in mind a new business needs to build a credit rating, just as a person needs to build a credit score.
Michael Germanovsky is a personal finance expert with in-depth knowledge of credit cards, charge cards, and pre-paid cards. In 2011, Germanovsky created the Student Credit Card Education Initiative and sounded awareness of high interest rates. Michael is editor-in-chief at Credit-Land.com