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Building business credit is a fairly simple procedure, and is similar to building personal credit in many ways. The primary difference is the start up process, which is more complex because the credit you are building is not the credit of a person, but the credit of a fictitious business entity. It also follows some slightly different rules, which we will outline in this article.
The creation of a business credit profile starts with the incorporation of the business. You must form either an LLC or a c-corp in order to distinguish your business from a sole proprietorship. The decision depends entirely on what you want to do; if you want to have an easy to set up, flexible, easily manageable business, you should go with an LLC. If you want a stable business that you plan on using formally and have strong intentions of expanding, incorporation is probably going to be a better plan. Your corporation must then be registered with the IRS, and you will need to set up a few business essentials: a dedicated phone line, a bank account in the business’s name, and a few basic merchant trade lines. Once you are done, you can start with registering your business with Dun & Bradstreet, Experian or one of the other main business credit bureaus.
Now, you can focus on building business credit. You can start by applying for some small business credit cards. You want to be sure that your first business credit cards are not going to factor your personal credit into account, which may make the options seem limited. One thing that you can do, however, is to apply for a secured credit card; this means that you will have to hold a savings account with a certain specified minimum that your credit issuer can use as collateral. While annoying, this will help you get your first credit card and get you started building business credit.
Unlike personal credit, business credit is dependent on other factors, such as the longevity of your business and its profitability. Overall, these are much greater factors in determining your final Paydex score. However, the foundations of building business credit remain very similar to those of personal credit, so be sure to open up some trade lines and start creating a strong business credit score today!