Business Credit: Why Small Business Owners Need Business Credit

If you currently have a business or you are considering starting one, establishing business credit is a good idea. According to the National Association of Credit Management (NACM) small business owners should take steps to establish credit in the name of their company as a way to preserve cash flow for necessary business operations, purchases, and rental payments. Here are a few basics to begin building business credit.

Separate Your Business Credit from Personal Credit

Business credit can and should be established separate from personal credit. When owners use their personal credit to obtain business credit, they run the risk of lowering their personal credit scores. The owner also risks being personally responsible for business liabilities. If you file bankruptcy and your personal and business credit are one in the same, you stand to lose everything. Business credit protects your personal assets.

No Personal Guarantees

The most important element to establishing business credit is finding lending institutions, credit card issuers and vendors that will establish credit without you giving a personal guarantee. A personal guarantee involves using your personal credit information to guarantee repayment of the debt incurred by the company. In other words, you are obligating yourself to be 100% responsible for the company's debt. It may be your intention to fully repay any debt incurred; however, obligating your personal and business assets to repaying company debts can lead to financial ruin if any economic setbacks occur.

Business Structure

Doing business as a sole proprietor will not allow you to distinguish your business credit from your personal credit. As a sole proprietor you are not a separate business entity. In order to establish business credit without a personal guarantee you must structure your company as a separate legal entity such as a corporation or limited liability company. Even if you have been doing business as a sole proprietor for years, you can restructure your company into a separate legal entity. Besides, it is a better choice to set your business up as an entity separate and apart from you. Your company could get sued and if all of your assets are tied together, financial ruin may be lurking in the background. Having a separate entity protects your personal assets.

Tax Identification Numbers

You must have an Employer Identification Number (EIN) also known as a Federal Tax Identification Number (Tax ID) for your company. The EIN is your permanent number and can be used immediately for most of your business needs, including opening a bank account, applying for business licenses and establishing a business credit file. Never use your social security number. It may also be necessary to establish a State tax identification number. You may apply online at the IRS for the federal tax identification. The application process is fairly simple and you can receive the EIN immediately.

Business Checking Account

You should have at least one bank account, in the name of your company that can be used as a bank reference. The older the bank account, the better. Having a business checking account helps in establishing your company's identity and reputation. Banking relationships are still important in the business world. Building a strong relationship with your bank can be of assistance when you begin to seek further financing such as loans and lines of credit.

Get a Business License

You must always register your business and obtain a license in the State, County or City where you conduct business. For some reason, this is not always done. It should be at the top of your "to do" list. Always register your business in the jurisdiction where you conduct business.

For a step-by-step process for building business credit, please visit: Business Credit