It’s probably no surprise to entrepreneurs that checking and cleaning up your personal credit report is important to your business. However, you might be surprised at the number of small business people who haven’t separated their business and personal credit. And that’s really too bad, because commingling personal and business credit can have disastrous consequences for both.
Think about it. If you and your business are one and the same, as is the case for countless entrepreneurs, you put all of your personal assets and credit at risk if something should go wrong down at the shop. And vice versa. If you personally get sued and your business is not legally different than you, your business becomes an asset that creditors can go after.
So why don’t more small business owners create a separate business credit profile? The likely answer is that many don’t know how. We all basically know how personal credit works and how to build a positive credit history: Pay your bills on time, take on some credit card debt, and pay it back. Get a car loan. Pay it back. You know the drill.
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Business credit often seems like a mystery for many small businesses, but it shouldn’t be. The process of getting business credit is not really all that different than building your own personal credit profile.
Here’s how:
The essential first step in building business credit is, as I have indicated, to separate yourself from your business, and you do that by incorporating. A corporation is a separate legal entity, distinct and apart from you. A sole proprietorship is not a corporation, nor is a partnership. If either of those is your form of business, you would need to change to a corporation or a limited liability company (LLC).
Because a corporation or LLC is a separate legal entity, it’s the easiest way to begin to create business credit apart from yourself.
Think of an EIN as the Social Security number for your business. Issued by the IRS, an EIN identifies your business for tax and credit purposes. If you don’t have an EIN, get one from the IRS. Again, having one allows you to detach your Social Security number from your business’s credit profile. This has the added benefit of decreasing your odds of being the victim of identity theft.
Dun & Bradstreet is the main purveyor of business credit information. Its system of following your business is the D-U-N-S number, which stands for Data Universal Numbering System. By getting one, you allow Dun & Bradstreet to create a credit profile for your business.
Using your EIN and D-U-N-S number, go to your bank and open up a checking account for your business, one that’s separate from any personal accounts you have. Separating business and personal funds in this way helps reinforce the liability protection of an LLC or a corporation.
I will explain why in a moment, but suffice it to say that having a business savings account can help you establish credit.
Whatever business credit accounts you have — phone, Internet, bottled water, or whatever — put those accounts in the name of the business, again, using your EIN and DUNS number for identification. See if any of your vendors will do the same.
Getting commercial credit is an easy way to begin creating business credit.
If your business has a savings account, you may be able to use it as collateral to apply for a small secured loan. Some banks offer these loans to new businesses as a way to help build credit. When your business repays the loan on time, it shows lenders you’re responsible — which helps establish your business credit profile. Be sure to check with your bank to see if they offer this type of loan and whether they report payment activity to business credit bureaus.
Repay all of this credit on time and in full.
Dun & Bradstreet isn’t the only credit bureau out there. To build a complete business credit profile, it’s a good idea to register your business with other major agencies like Experian Business and Equifax Business. This helps make your credit activity visible to more lenders and vendors.
Just as with personal credit, it’s smart to keep an eye on your business credit reports. Monitoring your reports helps you catch any errors early and make sure your positive credit activity is being reported correctly.
Many vendors offer “net-30” payment terms, which give you 30 days to pay your invoice. Opening accounts with vendors that report to business credit bureaus — and paying those invoices on time — is a simple and effective way to start building your credit history.
Before long, your personal credit will be personal, and your business credit will be business, and that is as it should be.
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Steve Strauss has been a senior small business columnist at USA Today and the author of 15 books, including The Small Business Bible.
Disclaimer: The content on this page is for information purposes only and does not constitute legal, tax, or accounting advice. If you have specific questions about any of these topics, seek the counsel of a licensed professional.
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