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.
Many of us form a small business as a sole proprietor. The money we earn is the money that pays our expenses. Sometimes we’re sloppy about mixing personal funds with business funds. Then the happy day arrives when we have an opportunity to expand our business. Although we’ve paid our bills on time and our personal credit is good, we cannot qualify for business credit separate from our personal credit, because we have not laid the required foundation.
To qualify for business credit, you must complete several steps in the right order.
- First, name your business. As you do this, remember this name must be on your stationery, listed in the Yellow Pages, on your Web site, on your bank account, on trade charge accounts and business credit cards, on product packaging and marketing materials. In addition, it should be easy to remember for anyone who does business with you. It will be essential, for your business credit rating, to be absolutely consistent with name usage. Follow the naming process in your state to reserve your company name.
- Next, you need to incorporate. Unless you’re knowledgeable about the advantages and disadvantages of a corporation versus a limited liability company in your state, consult an accountant or corporate attorney about the best structure for your needs. With forms and instructions available on Secretary of State Web sites, most states have made incorporating simple enough that you can probably do it yourself, after you decide on a corporate structure.
- Decide where your business will be located. If it’s a home-based business, use your home address for all billing. You may prefer to have bills sent to a post office box. If so, be sure all company documents, checks, accounts, etc., include both your mailing address and your actual business address.
- Apply for your EIN (Employment Identification Number) from the IRS in your company’s name.. You can do this online, 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.
- Establish a business phone line with your company name listed in 411 and with an automatic Yellow Pages listing. In some areas, you can establish a business line (listed with 411) for a minimum monthly charge. All calls to your published business line can be forwarded to another phone, such as your home phone or a cell phone. Again, your billing address for the phone should be the same address as your company location.
- Open a business checking account. Often smaller community banks will be more accommodating to small local companies. They may require a lower minimum balance and offer more generous transaction processing costs than larger banks. It will be worth your time to evaluate a variety of banks before you open a business account and begin to build a long-term relationship with your bank.
- Secure all necessary business licenses and permits required for your type of business in your city and state.
- As soon as you receive your first company phone bill, take it, along with your business checking account information, to your neighborhood Staples to open an account. Staples has a reputation for extending credit to small start-ups without requiring a personal credit reference. This 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.
Building excellent business credit is much more straightforward than building personal credit. Next week, I will discuss applying for your D-U-N-S number, which is your credit identification number, from Dun & Bradstreet; opening additional trade accounts and qualifying for business credit cards without using your personal credit; securing a business loan; and the overall process of developing and maintaining an excellent business credit rating.