These can be challenging times to start and grow a new business. Opportunities are plentiful, but the economic landscape is rocky and often unpredictable. So how can you build business credit and grow your business, even in a rapidly changing economy? Here are some tips to help you get started.
1. Choose an Appropriate Business Structure
The structure you select for your business is important, as it will establish your relationship to the business and your financial responsibilities within it. If, for example, you are operating as a sole proprietor, you’ll be entirely responsible for the profits (or losses) of your business. And if the business fails, your personal assets may be at risk. Choosing a different model, such as a partnership or LLC (limited liability corporation) allows you to insulate your personal assets from any potential business losses. Once you choose an entity for your business your next step will be to obtain a tax ID number.
2. Obtain a Federal Tax ID Number (EIN)
Another important step in establishing business credit is acquiring a federal tax ID number (or EIN — Employer Identification Number). Applying is easy using the EIN application form provided by the IRS. Once you complete the form, you’ll be assigned a 9-digit EIN that you’ll use when filing your business taxes, opening a business bank account, applying for licenses and permits, and building your credit.
3. Open a Business Bank Account
Now that you’ve obtained an EIN, your next likely step will be to open a business bank account. This essential step lets you separate your business and personal assets. Your banking relationships also say a lot about the way you manage your business—and your business bank account will be an important reference source for potential lenders seeking to evaluate your financial strength.
4. Build a Business Credit History
Building a credit history for your business can be accomplished in several ways.
Apply for a Business Credit Card
Business credit cards help to establish a borrow-and-repayment history, which can strengthen your overall credit picture. By making all payments promptly, you can strengthen your business’ financial profile and improve your business credit score.
Open a Line of Credit
Banks like reliable borrowers, and are open to extending lines of credit to growing businesses with a solid repayment history. Need to make a big capital equipment purchase or planning to relocate to a larger facility? A line of credit can provide the quick infusion of cash you need. And prompt repayment of the loan can only strengthen your business’s credit rating.
Sometimes you just need a loan to get you through to the next vendor payment. Bridge loans can help your business weather lean times, allowing you to repay the loan when your income streams are more robust. Bridge loans are a great way to establish credit quickly—while keeping your business on the move!
Small Business Loans
The COVID-19 pandemic has placed new pressures on the economy, making it harder for small businesses that depend on foot traffic to thrive. Fortunately, there are some rescue options. A small business loan can help you buy equipment, pay staff, update your business, and maintain relationships with vendors during this unstable period. Prompt repayment is also another great way to establish and build your business credit.
5. Keep Pace with Payments
Perhaps the most important thing about building your business credit is the payment relationships you create. Monitor your financial relationships carefully and set reminders so you never miss a due date. If for some reason you cannot make a payment on time, contact your creditor and work with them to re-establish regular payments. Many creditors would prefer working with you to resolve a small issue, rather than sending you into collections.
6. Build Relationships with Suppliers & Vendors
The human relationships you create are also a big part of your overall business credit picture. By becoming known as a reliable partner in business, you build important references that speak well of your credit. Successful business relationships can be leveraged later on to obtain lines of credit or short-term bank loans.
7. Monitor Your Business Credit Score
There’s no substitute for diligence, and tracking your business credit score is a great way to stay ahead of any unanticipated blips. Each of the business credit agencies provides a way for you to update basic information about your business. Find outdated or incorrect information? You now have a way to contact the agency to make the appropriate change. With an established business credit report, you may get higher credit approvals, as well as better interest rates and repayment terms on loans and lines of credit.
We hope you’ve found these tips useful. At Moskowitz LLP, we pride ourselves on our team of financial and tax experts. Starting a new business? Need help understanding your tax obligations?
Don’t go it alone. Contact us today!