There are a lot of exciting things that happen when you start a business, but many new business owners do one bad thing—use their personal credit to operate the business. This might appear convenient at first, but it can muddy the waters between personal and business finances and make it more difficult to secure funding and raise personal financial risks. One of the best ways to form a healthy business is to learn how to form business credit with your EIN.
As a new LLC, start-up, or small business owner, establishing business credit enables you to establish your company’s financial identity. We’ll guide you through the process step-by-step to help you create a strong credit profile and set your business up for success.
Why Building Business Credit Matters
Business credit is more than just a number; it is your business’s financial credibility. Having a good business credit rating can open the door to better financing opportunities, increased credit lines, and better relationships with vendors and lenders.
Protect Your Personal Credit
Personal credit cards are often used for business expenditure by many first-time business owners. This may appear to be nothing a lot more than a small charge in the initial, but it raises your personal debt and can hurt your personal credit rating.
Using your EIN to build business credit will enable your business to have its own credit profile. As time passes, your business may be eligible to receive financing without being dependent on your individual credit history.
Improve Your Chances of Business Financing
Having a good business credit score opens the doors to financing options such as a line of credit, loans, and other funding alternatives for small businesses. Your business credit history is also a major factor for banks and lenders when considering financing.
Favorable interest rates, increased borrowing power, and improved repayment terms are more likely to be offered the better your business’s credit profile.
Strengthen Your LLC’s Liability Protection
If you are a limited liability company, it is important to maintain a separation between your business and your personal finances. Intermingling funds can reduce the legal protection that your LLC provides.
A business’s EIN, separate business bank accounts, and establishing a business credit profile establish the fact that the business is a separate legal entity.
The more you can, the better. The more, the better is the rule.
How to Build Business Credit Using Your EIN
There is no quick way to build business credit, but the following steps will help get your business on the right track.
Step 1: Get an EIN
Your Employer Identification Number (EIN) is similar to a Social Security number for your business. This is officially issued by the IRS and is necessary for many business activities like opening a business bank account, filing taxes, and applying for business credit.
An EIN is also the basis of your business credit profile. If you do not have it, it will be harder to keep your business and personal finances separate.
When looking for business funding, the first thing you should do is get an EIN.
Step 2: Open a Business Bank Account.
After you get your EIN, create a separate business bank account.
A business bank account will assist you in:
- Separate business and personal finances
- Keeping up-to-date financial records.
- Establish trust with lenders
- Simplify tax preparation
- Show that transactions are legal and legitimate business activities.
Don’t use a personal checking account for business profits or losses. Separate finances not only help to protect your business but also help in the process of building business credit.
Step 3: Set up Net-30 Vendor Accounts
The easiest way for startups to get onto the business credit scene is to start opening Net-30 vendor accounts.
Net-30 accounts are for people who buy products or services and then pay the bill within 30 days. These vendors will report to business credit bureaus, and your business starts to build up a positive credit profile.
To gain the advantages of Net-30 accounts:
- Make timely payments on bills.
- Collaborate with vendors that report payment activity.
- Use accounts regularly but not overspend.
One of the most important determinants of building good business credit is timely payments.
Step 4: Apply for a Business Credit Card
Once your business bank account and a few transactions are in the books, you may want to apply for a business credit card.
A business credit card can be of assistance:
- Build payment history
- Manage cash flow
- Separate business expenses
- Earn business rewards
Responsible use of the card, maintaining low balances and paying the full amount, if possible. Making use of credit responsibly will portray financial stability and help build a healthier business credit score.
Step 5: Keep an Eye on Your Business Credit Reports
There isn’t a single set of steps you go through to create business credit. It is important to keep an eye on your business’s credit reports regularly, so that your information is correct and updated.
Your reports enable you to:
- Keep an eye on your business credit score
- Identify reporting errors
- Detect fraudulent activity
- Know what’s on their mind (how they consider your business).
Reviewing your reports regularly keeps you informed and can help you identify inaccuracies to correct before they impact finance options. If you haven’t applied for an EIN yet, check out our guide on How to Apply for an EIN with the IRS: A Step-by-Step Guide for New Businesses to understand the application process and get your business set up correctly.
Common Mistakes That Hurt Business Credit
It’s important to be consistent to build business credit, but there are a few common mistakes that can hinder your progress or hurt your business credit file.
Using Personal Credit Cards for Business Expenses
Business expenses paid with personal credit cards can make it hard to control finances and also raise personal financial risk.
Otherwise, utilize business accounts and business credit cards.
Mixing Personal and Business Funds
Mistakes that can make accounting more difficult, and potentially undermine your LLC’s liability protection, include, but are not limited to, putting business money into your own account or paying business bills from your personal account.
Keep all business transactions separate in separate accounts.
Paying Yourself Incorrectly
Between the personal and business accounts of many new business owners, there is a high rate of transferring funds without proper documentation of the transaction.
Set up a standard way to pay yourself and stay on top of your finances to have clean books!
Missing or Late Payments
Payment history is among one of the most essential elements when it comes to business credit scores.
Just one late payment can affect your credit score and be a disadvantage if you are looking for financing.
Make reminders or schedule payments, if possible, to keep you on track.
Never Checking Business Credit Reports
Many small business owners are unaware that errors can be listed on business credit reports, as they can be on personal credit reports.
By regularly monitoring, you can make sure your business is being credited accurately and can correct inaccuracies in a timely fashion.
Conclusion
Establishing business credit is not only for the purpose of securing loans; it’s about laying a solid financial groundwork for your business. Building business credit with your EIN can help you keep your business and personal credit apart, help lenders take notice of your business, and make it more likely that your business will get the credit it needs as it expands.
First, get an EIN, a separate business bank account, and practice responsible credit management. By making regular payments and managing your finances wisely, your business can build a solid credit profile over time, which will benefit its long-term success. Building business credit is just one part of running a successful company. Make sure you’re also maintaining proper LLC compliance records to protect your business and keep it in good standing.
Frequently Asked Questions
Is it possible to establish business credit without a business license?
While an EIN is the foundation of business credit, having business accounts, relationships with vendors and payment history is the key to developing a good business credit profile.
What’s the timeframe for establishing business credit?
It takes 6 to 12 months of regular and timely payments and good credit usage to build a strong business credit score, although most businesses can start building credit in a few months.
Does business credit impact personal credit?
In the majority of businesses, it is a separate credit rating from the individual’s. But in the case of a personal guarantee of a business loan or business credit card, failure to pay could adversely affect one’s personal credit rating.
