It can be a challenge for small businesses to acquire the proper funds they need to set up shop and/or to keep it running smoothly. It is also difficult to keep business and personal accounts separate and to build business credit. As a new business owner, a small business credit card might be just the thing you need. If you have an established business, than a business credit card may be a convenient way for you to manage your cash flow or provide emergency funds when your money gets tight.
Personal Liability For Corporate Spending
Lenders are not quick to give lines of credit or business credit cards to new start-ups and small business that do not have an established business credit history. Banks use your personal history when considering you (and your business) for credit. You will be personally liable for all spending using your business credit card and reports will be made by the three consumer credit agencies (Equifax, Experian and Transunion), rather than business credit agencies. Continue reading below to find out how to establish business credit without personal credit.
Having your business credit card accounts linked to your personal accounts isn’t the best situation. Large lines of credit for your business may make your personal financial situation appear worse than it really is. If you’re late on a payment or default on a business account this could damage your personal credit history too. Less than good credit can affect your purchasing power and increase your interest rates. You lose options and money. The bottom-line – use a business credit card wisely and keep a clean credit report.
Shopping Around For The Best Credit Offers
If you already started looking around for small business credit cards, you know there are hundreds of cards to choose. From zero percent introductory rates and no annual fees to frequent flier credits and cash back rewards. How can you possibly know which one to choose?
The great thing about small business credit cards is that they offer a few more perks that cater to the needs of business owners, as compared to personal credit cards. Low APRs… large credit lines… grace periods beyond 30 days… frequent flier programs… no fee employee credit cards… Take time to shop around. Depending on your spending requirements and business needs, you can find a business credit card that works best for you. [Here Is A Good Place To Start]
Building Your Credit
Once you’ve opened up a new business credit card, use it to make purchases on a regular basis and pay off your balances each month. Pay close attention to your personal credit report, ensuring that it stays free of errors, late pays and delinquencies.
After two to five years, you can request that your business accounts be separated from your person accounts. If you can prove that your business is viable and your personal credit history is squeaky clean, then most banks and business credit card issuers will remove the personal liability clause. All business’s financials will be reported exclusively to business credit agencies and your business spending will no longer be linked to your personal accounts.
Although small business credit cards aren’t considered capital, they can be a tremendous help in the running of your business. In tough times just starting out, it can also add a sense of security. Establishing business credit is difficult but with a little basic knowledge business owners can enjoy many benefits of financial freedom. From making purchases online or cashing in on those frequent flier miles, you can effectively manage your cash flow and even save money with small business credit cards. [Apply For A Business Credit Card Here]
Steps To Start Building Your Business Credit
1. Incorporate your business
Even though you may be incorporated when you’re reading this, it deserves a mention. With sole proprietorships and general partnerships, the business is legally the same as the owner; therefore, there can be no separation of business credit history from personal. Incorporating a business or forming an LLC creates a business that is legally separate from the owner(s).
2. Obtain a federal tax identification number (EIN)
The EIN is basically a social security number for a business. It is required on federal tax filings, and is also required to open a business bank account in the name of the corporation or LLC. In order to comply with IRS requirements, many larger businesses also require an EIN from their vendors in order to pay them for services provided.
3. Open a business bank account
Open a business checking account in the legal business name. Once open, be sure to pay the financial transactions of the business from that account. If you use a business credit card (see below) for many financial transactions, be sure to pay the credit card bill from your business checking account.
4. Establish a business phone number
Whether you use a landline, cell phone or you use VoIP, have a separate number for your business and in your business’s legal name. List that number in the directory so it can be found.
5. Open a business credit file
Open a business credit file with all three business reporting agencies: Experian, Equifax and TransUnion as well as Dun and Bradstreet
6. Obtain business credit card(s) [Go Here]
Obtain at least one business credit card that is not linked to you or any other owners personally. Pick a business credit card from a company that reports to the credit reporting agencies.
7. Establish a line of credit with vendors or suppliers
Work with at least five vendors and/or suppliers to create credit for your company to use when purchasing with them. Ask them to report your payment history to the credit reporting agencies.
8. Pay your bills on time
Perhaps it should go unsaid, but be sure to pay your bills on time. Like with your personal credit, late payments will negatively impact your business credit.
The Benefits of Having Good Business Credit
Having good business credit can provide a number of benefits, including:
- Positioning your company for more favorable payment terms with new vendors and suppliers.
- Reducing the number of times you will need to prepay for products or services purchased.
- Allowing you to obtain better interest rates and credit terms from lenders and banks.
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Also published on Medium.