As a small business owner, you may be wondering whether it is essential to establish credit for your business.
You know the role that personal credit can play in your life. It helps determine the rate you get for loans and even loan eligibility. It can also impact the rates you pay for things like insurance.
Business credit does not work in the same way.
However, taking steps to ensure that your business is creditworthy is essential. Good credit means you are ready if you ever need to borrow money.
Does Your Business Need Credit?
You may think you will never need a business loan.
So many small business owners thought this was true before the COVID-19 pandemic.
Then, the shutdowns began.
Businesses found themselves suddenly without revenue and without the resources to stay open.
While the government eventually put lending programs in place to help businesses, many closed before getting that aid.
You never know when your business will need to be creditworthy.
Start building its credit, now.
Separating Business from Personal
Many, if not most, small business owners start out funding their business with personal resources. They use their own credit to secure any needed loans.
However, you should be treating the business as something separate from you.
That means establishing it as a business and getting an Employer Identification Number (EIN or FEIN).
You use your EIN instead of a social security number for your business credit transactions.
In addition to getting an EIN, you want to create a distinct entity legally. That means creating a corporation or limited liability corporation or limited liability partnership.
Qualifying for Commercial Credit
If you are applying for a business loan, the lender wants to see that you are actually a business. The EIN and establishing a corporate identity are significant first steps.
You also need:
• A physical business address
• A separate business phone
• A website
• Any required business licensing
• History of profits and tax returns
The Role of Personal Credit In Business Financing
Even when a business is established as a separate identity, a lender might ask you to take on personal responsibility for a loan.
• You may need to show your income.
• The lender might consider your credit score.
• The lender may ask for collateral, such as your home.
• Personal credit counts in most areas of business credit. While a bad personal credit score will not necessarily prevent you from borrowing, it can lead to higher interest.
Get Started Establishing Business Credit
Just like with personal credit, you need to devote time to establishing your business’s credit. Even if you do not need to borrow, consider getting a dedicated business credit card for expenses.
Fortunately, business credit scores are not as difficult to establish as personal ones. They are based solely on whether the business is paying its bills on time.