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Establishing business credit is more difficult than it was when I wrote my 2008 series, You Can Build Awesome Business Credit. Major office supply retailers, such as Staples and Office Depot, extended credit to start-ups without a personal guarantee; your enterprise could be issued a business credit card from Advanta, using only your EIN (Employer Identification Number) and business bank account to qualify. Unfortunately, too many companies defaulted on their debts. Liberal account policies for start-ups washed away with small business loans and easy-qualification mortgages.
If you’re like most people, you’d prefer a root canal over dealing with credit issues. I understand. I came to this credit wonk career after years as a marketing executive and serial entrepreneur. However, unless you’re independently wealthy, you will probably need credit to manage and grow your business. To preserve and improve your personal credit, you must keep your business credit completely separate from personal credit.
In my last column, Build Awesome Business Credit in 2010 – Part 1, I laid out seven steps to complete prior to opening accounts:
- Carefully choose your company’s name.
- Decide on your short-term and long-term business location.
- Select the best legal structure for your situation.
- Secure your Employer Identification Number (EIN).
- Establish your business phone line.
- Interview bankers and open business bank accounts.
- Apply for appropriate licenses and permits.
Next, you want to get a DUNS number from Dun & Bradstreet (D&B), the original business credit rating organization. When you apply for accounts, you’ll notice that many business credit applications ask for your DUNS number. It identifies your business credit file in the D&B system. Go to the D&B website to fill out their easy application. Copy the precise information you provide so you can access your account in the future. Their system requires you duplicate information exactly. You will receive your DUNS number via email. Before that happens, D&B will attempt to sell you services.
Every week I hear from distraught readers, who were led to believe they must pay for D&B products to receive their DUNS number or, as a sales rep told me, “It will take a month to get your number unless you disclose business finances or buy products.” D&B processes DUNS numbers rapidly. And you don’t need to buy anything. Mine arrived within a week, following that conversation. There are no privacy laws regarding business credit. Anything you say to a D&B sales rep is likely to be included in your credit file, which can be purchased by anyone. Knowing this, you want to resist any desire to be rude. And you must decide whether your company financial data should be public. You can tell sales reps you only need your DUNS number.
If you’ve owned your business for a while and opened company accounts, your enterprise may have a DUNS number. Check before you apply for a new one.
Other credit reporting agencies, such as Equifax and Experian, also create business credit files. They combine personal credit history with business credit history. With very good personal credit, it can be an advantage to also have Equifax and Experian credit files. However, if you’ve encountered personal credit problems, you’ll be better off focusing on D&B, which will rate your credit based on your business’s payment history.
After you receive your DUNS number, select three local businesses – not local stores that are part of a national chain – which sell supplies you need for your company. Call ahead; schedule meetings with owners. Tell him or her about your new business. Convey your enthusiasm. Explain that you need to establish business credit separate from your personal credit. Ask if they can set up an account for you for a minimum amount – maybe a $300.00 limit – so your company can begin to establish a credit history. Remember: When you supply your Social Security number (SSN) on any application, you have personally guaranteed the account and the debt is your personal debt although you’re incurring it for your business. Open accounts using your EIN, not your SSN. Three accounts will provide an initial foundation for you. Local vendors may or may not report your credit history to D&B. You need the accounts to use as trade references later.
The strategy to rapidly drive up your D&B Paydex score is to always pay your bills before your creditor sends invoices. You want to develop this payment habit with your first accounts. This means you will have money to pay for what you’re purchasing immediately after you buy it. The only reason you’re charging supplies on accounts is to begin your business credit history. Use your three accounts each month for three months. Pay the bills soon after purchasing, and always prior to invoicing by a creditor.
In the next column, I’ll provide detailed information on accounts available to young businesses now – ones you can open using your trade and bank references plus your EIN.