Why is business credit so important? It’s the main way companies evaluate whether they want to do business with you — and on what terms. Companies rely on your creditworthiness to make critical decisions, including whether:
- to sell to you
- to lend you money
- to lease the equipment you need to grow your business
- to help you carry more inventory
- to give you favorable financing rates and terms
To qualify for business credit, you must first complete several basic steps. First, name your business and incorporate it. Most states have made incorporating simple enough that you can probably do it yourself.
Next, apply for your Employment Identification Number (EIN) from the IRS in your company’s name. You can do this online at www.irs.gov, or by phone, fax, or mail. The IRS has made the application process easy. Your EIN will be the tax identification number for your business, just as your Social Security number is your personal tax ID.
You should also get all necessary business licenses and permits required for your type of business in your city and state. In the United States, the Small Business Administration has a list of links to state web sites for licensing requirements. Each state has its own business registration and licensing requirements.
Now it’s important to separate your business credit profile from your personal credit profile. Start by opening a business checking account. Often smaller community banks will be more accommodating to small local companies. These banks may require a lower minimum balance and offer more competitive transaction costs than larger banks. It’s worth your time to evaluate a variety of banks before you open a business account.
As soon as you have your business checking account, it’s time to open up a trade account. Go to one of the companies listed below, which have a reputation for extending credit to startups without requiring a personal credit reference:
- Home Depot
A typical business account will have Net 30 terms. This means it must be paid in 30 days. However, unlike personal credit, your business credit score gets a boost when you pay early. Charge some office supplies to your business account right away and pay the bill immediately.
You can also start building business credit even before opening your doors by having a well-written business plan. Be prepared to defend everything in your business plan by showing how you came up with your figures and developed your plans.
A sound business plan is important because vendors will look at it to determine whether they should extend credit to your company for the purchase of goods and services. A good plan can help assure vendors that your company represents an acceptable credit risk.
Of course, if vendors do grant you credit, you must make prompt payments and make sure they’re reported to the credit bureaus. One of the best ways to build and improve your business credit report is to work with suppliers who are reporting your prompt payments to a business credit bureau like Dun & Bradstreet, the parent company of AllBusiness.com.
Another method of getting your credit started is through loans guaranteed by state or national business associations, such as the Small Business Administration. Paying back such loans on time can also help you establish your business credit profile.
SBA guaranteed loans may be the best initial option. These loans generally work best if you have very good personal credit, supporting documentation such as personal tax returns, and are seeking a relatively small loan amount, typically $100,000 or less.