When it comes to owning a business, one of the most valuable assets you can have aside from a strong work ethic and an end-to-end technology solution, wink-wink, is a high credit score. Most new business starting out do not have the capital in place to purchase their equipment outright. They often seek financing to offset those startup costs. What many don’t realize is it can take a couple of years for a business to establish proper credit. However, there are a few actions you can take to get you on the fast track to a high FICO credit score.
File for a Federal Tax ID or EIN
When applying for financing, it’s essential for your business to have to proper credentials. The Federal Tax ID or EIN is mostly the same thing to a company that a social security number is to a person. Filing for your EIN is entirely free, and the number only serves as a means of tax administration. Keep in mind, while the number does create a means to establish credit, it does not build credit for you.
Incorporate Your Business or Form an LLC (Limited Liability Corp)
One way to differentiate your personal credit score from that of your business is to incorporate your business. Incorporating your business allows you to make a clear distinction between you and your business. Making this distinction provides business owners with some safety if the company were to be sued. If the business is seen as an asset and not a separate entity from the business owner, creditors can legally go after the owner.
Open a Business Credit File
A great way to establish your credibility as a business is to open a business credit file with the three major reporting agencies: Experian, Equifax, and TransUnion. For any financial institution or equipment leasing organization, lending money is made based upon limiting as much risk as possible, while still providing the needed service to the customer. Similar to your EIN, a financial institution may also request you provide them with a D-U-N-S number from the Dun & Bradstreet to predict your credibility through commercial data.
Open a Bank Account
By opening a bank account with your Federal Tax ID, you can purchase products or supplies from third-party vendors. According to NerdWallet, if these suppliers extend trade credit, you can ask the supplier to report your payments to a business credit bureau. As long as you are working within the terms of the agreement, it can have a positive effect on your credit score.
Personal Credit Score
Many new business owners don’t consider how their personal credit score can affect their eligibility to receive credit for the much-needed equipment for their company. You should try to apply for credit before you need it. However, if you are like the vast majority of the population, you will wait to apply until you need money. By then, you may have already tarnished your credit, or you just don’t have the history.
So as you begin to build your business, remember the important factors that can help you build your credit score.