Most business owners use credit for business expenses, including buying equipment and inventory. Unfortunately, most are using their personal credit cards and loans. While this largely unavoidable when you’re just starting out, it’s definitely risky. Personally guaranteeing business loans and credit accounts means you are completely liable for the debts. If your business is sued or you cannot pay back the debts, it will be you that is responsible — not the business.
While it’s possible to establish business credit for a sole proprietorship, it’s much harder to do because your business is not a separate entity. The easiest way to get started on establishing credit for your business is forming a limited liability company or LLC. Forming an LLC protects you and other owners from being personally liable for business debt and it establishes a clear separation between the owners and the business — one of the first steps to establishing business credit.
Steps to Establish Business Credit
These are the basic steps you will need to follow to establish a business credit history in the name of your business.
1. Form an LLC. The first step is forming your LLC to create a legal entity that is separate from the owners.
2. Get a federal tax identification number. Next, request an EIN, which works like a Social Security number for your LLC. You will need an EIN for federal tax filings and to open a bank account for your LLC.
3. Open a bank account. You will also need to open a business bank account in the name of your LLC. Make sure you pay business expenses from this account, not your personal account, or you risk “piercing the corporate veil,” which means it may be ruled that your LLC is not managed as separate from your personal assets.
4. Get a business phone number. Your business will need its own phone number in the LLC’s name.
5. Open a credit file. You will need to open a credit file with the three main credit reporting agencies: TransUnion, Equifax, and Experian.
6. Obtain business credit cards. The fastest and easiest way to start establishing credit in your LLC’s name is applying for business credit cards that report to the agencies above. You will need to provide your EIN to apply. Examples of business credit cards include the American Express SimplyCash and the Chase Ink Cash cards.
7. Establish a line of credit. It’s also important to establish credit lines with vendors and suppliers that you work with. Just as with personal credit, it’s important to have a mix of credit types on your business credit file. Ask your vendors to report your payment history to the credit bureaus.
8. Pay on time. Finally, make sure your bills are paid on time as late payments will hurt your LLC’s credit.
Establishing good credit history as soon as possible is important for several reasons. It positions you to get more favorable payment terms with new vendors and it helps you secure better terms when you need business loans. The first step is forming an LLC. You can learn more about forming a limited liability company by consulting with an attorney or business services company.