If you are a small business, and you have applied for any financing, you know how difficult it can be to access capital and to establish business credit. From hiring and retaining employees to developing new products and services, to expanding into new markets, capital and business credit are essential for business expansion. Here is how to establish business credit in 2019:
How to Establish Business Credit in 2019
1. Establish your business as a legal entity.
If you haven’t done so already, now is the time to structure your business. Financial institutions do not lend to sole-proprietors, so you have to establish a legal entity. The entity you choose will depend on a number of factors. Consult with a tax attorney or your local Small Business Development Center to discuss which entity is best for your business.
2. Obtain an Employer Identification Number (EIN)
An EIN is used for tax administration and is required to open a business bank account or apply for financing. Apply for one free at www.irs.gov. Once you have established your EIN, open a business bank account. It is important that you separate your personal and business finances. From a tax planning perspective, you’ll be able to maximize your business deductions and credits. Be sure to consult with your tax adviser for details.
3. Apply for a DUNS Number, issued by Dun & Bradstreet.
According to the Dun & Bradstreet website, “The DUNS number is referenced by lenders and potential business partners to help predict reliability and/or financial stability of the company in question.” The DUNS number is also required by many municipalities and the federal government if you want to secure government contracts.
Other Steps to Take
Finally, you want to make sure that you are using accounting software to keep track of your business transactions. You can use a cloud-based solution, like QuickBooks Online or Xero, to streamline your finances (on the personal side, apps like Mint.com will help you stay on top of your personal finances).
You will also want to build relationships with your vendors and suppliers. This is a vital step in the credit building process because your suppliers will report your payment history to the business credit bureaus. The major business credit bureaus include Equifax, Experian, and Dun & Bradstreet. As with your personal finance, these bureaus use metrics to compile a business credit profile and associated score. The most important metrics used include payment history, credit utilization, and length of the credit profile. The sooner you begin to build business credit, the better.
Establishing vendor relationships can take time but there are several suppliers who are small business-friendly. These include the office supply company, Quill, industrial supplier Grainger, and shipping giant FedEx. There are many others in the marketplace. You’ll have to do some legwork to find the best solution for your company.
It’s also worth noting that secured small business credit cards are a viable option. Banks, such as Wells Fargo and BBVA Compass, offer these cards. Some of the benefits include a low initial deposit, enrollment in a rewards program, and purchase protection. And, the annual fees associated with these cards may be tax-deductible—check with a tax expert.
Building your business credit profile is a long term strategy to increase the purchasing power of your enterprise. By doing so, you will be able to optimize your cash flow to grow. It is important to understand that business credit management is just as important as managing your personal credit profile, if not more. Make sure that you implement a process to keep track of your credit utilization and monitor your business credit profile, regularly. If there are any errors, take immediate action to address the concern.
By taking these steps, you will show lenders and vendors that you are serious about your business finances and the growth of your firm.