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Establishing business credit is an important technique for new entrepreneurs. It enables you to separate your personal credit from the success of your business, so that if your business fails, your personal credit will not be negatively affected. If they are not separated, the reverse effect can occur, negatively impacting you in both areas.
The first step is incorporating or forming an LLC. This creates a specific entity apart from you that is responsible for establishing business credit. You must then follow all the guidelines to make the business eligible for lines of credit. This includes the following:
– Obtaining all the necessary licenses and permits for the business.
– Getting a Federal Employer Identification Number (EIN). This is the business equivalent of a social security number, listing the business’ identity with the federal government.
– Opening a bank account with the exact name of the business.
– Creating a separate phone line specific for the use of the business.
You can then open business credit files with the three credit report agencies that are designed for business: Experian, Dun & Bradstreet, and Business Credit USA. These work much the same way as the three personal credit reporting agencies do. You are now ready to apply for business credit cards. The business credit cards are not linked to you personally. Like establishing personal credit, establishing business credit is rocky at first; very few business credit cards will accept a new applicant without considering his personal credit as well. Once you have business credit cards, you can begin building credit just as you would normally: by making purchases on credit, and paying your bills on time.
Because businesses are usually much larger financial entities than individuals, business credit builds at a slower rate than personal credit. You will probably want to get multiple business credit cards, and seek some other sources of credit building as well. Contacting local vendors and suppliers to see if you can have a small amount of credit extended to you is a very good idea.
There are also a few businesses out there that offer to help with establishing business credit, though they tend to have a bad reputation among businesspeople. Be sure to do your research before getting involved with these companies.