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Starting a business often involves acquiring financing, which can come from personal savings, angel investors or loans. However, these options are not always readily available, leaving businesses dependent on lenders such as banks and government programs.
To assess a business's creditworthiness and determine whether it is suitable for a line of credit, lenders look at the business's credit profile. This assessment takes into account factors such as payment history, credit utilization, credit mix and other financial indicators that reflect the financial responsibility of the company.
Establishing business credit: the basis for growth
Establishing business credit is crucial for new businesses, as it allows them to access financing, obtain favorable contract terms and establish a strong financial reputation. Here is a step-by-step guide to establishing business credit:
Incorporate your business: Business credit is separate from personal credit, so it is essential to incorporate your business as an LLC, C or S corporation, or LLP to create a separate credit profile.
Obtain an Employer Identification Number (EIN): An EIN serves as a benchmark for the IRS to track a business's tax returns and is required for businesses with employees. Sole proprietorships are not required to have an EIN, but it is recommended to protect personal credit from business liabilities.
Explore supplier credit: Supplier credit involves extending payment terms for purchases, allowing businesses to access supplies and pay for them later. This option is particularly advantageous for startups with limited cash flow.
Leveraging Supplier Credit: Supplier credit provides essential services or products on short-term financing terms, usually with minimal requirements. Net 30 accounts, which are due for payment within 30 days, are a common form of supplier credit.
Use service credit: Consistent and on-time payments for services such as Internet, web hosting, cable, electricity and cell phone airtime can also help strengthen business credit. These deferred payment contracts demonstrate a company's commitment to its financial obligations.
Consider retail credit cards: Retail credit cards are often easier to obtain than traditional business credit cards and may offer rewards such as cash back, points and discounts. These cards are usually limited to a single store or a large retailer's network.
Apply for business credit cards: Business credit cards provide access to revolving credit, allowing businesses to charge business expenses and gradually build their credit profile. These cards can be used for a variety of expenses, including licenses, insurance, taxes, utilities, payroll, supplies and marketing.
The Path to Success: Building Credit Over Time
Setting up business credit takes time, especially for startups. However, by using financial tools such as supplier credit, retail credit and business credit cards, businesses can develop a strong credit profile and pave the way for future growth and success.