How to Establish Business Credit for a Startup
Building personal credit is as easy as applying for a credit card but building business credit takes a few steps before establishing. Below is a step-by-step guide on the process of building business credit that will get you ready to start applying today.
1. Form Your Startup
The first step to building business credit is to form your startup. You won't be able to apply for loans, get credit cards, or have any business credit at all without an official business.
Choosing the right business structure will be your first step. Your main options include:
- Sole Proprietorship: If you will be the only owner and operator of your business, this is the simplest structure to form.
- Partnership: If you are partnering with another person or persons to start your business, you will need to set up a partnership agreement that outlines each person's roles, responsibilities, and ownership stake in the company.
- Limited Liability Company (LLC): This is the most common business structure for small businesses. It offers limited liability protection to the owners and is easy to set up.
- Corporation: The least likely option for a small business, but if you are planning to go public or seek investors, this may be the right choice. Corporations can be for-profit or nonprofit.
Each of these business structures will require a different process and documentation. You'll want to contact your local government agency to understand the exact process of incorporating in your state.
In addition to picking a business structure, your business needs a few foundational elements to be seen as professional by both clients and institutional lenders, such as a phone number, a business website, and an email address. An official office address will also help establish your business with the state (and, depending on your structure, is mandatory for filing).
These foundational elements will help your business build a professional and consistent image. Most of this information will be included in your business credit and will help show the state your business is reliable and trustworthy.
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2. Register Your Business With the State
The steps of registering your business with the Secretary of State (or applicable business department) will differ depending on the state you live in and which type of business structure you've chosen.
Below are some basic steps to ensure that your business is fully compliant with your state(s) of registration:
Determine If You Need to Register Your Business
The first action you need to take is determining whether or not registering your business with the state is even relevant. Only specific locations and business structures are required to register your business with the state.
Most small businesses that are sole proprietors will only need to register a “doing business as” (DBA) name with the state and local government to become fully registered. Even then, sole proprietors may not need to register at all if using a legal name.
Get a Registered Agent
Registered agents receive all service of process from the state for your business. This agent must have a physical address in the same state your business is located and be available at that address during regular business hours.
You can elect anybody to be your registered agent, including yourself. However, hiring a professional registered agent service will help you save time and money in the long run.
File Formation Documents With the State
Most businesses that register as LLCs, corporations, or nonprofit corporations will most likely need to register with the state they operate.
Online registration is becoming more prevalent with state agencies, but some offices will still require in-person meetings or offer physical mailing options.
There will be specific documents you need to file while registering your business, depending on the business structure you've chosen. You'll need to check with your local state on all the fees that are associated with registration.
You'll also need to include the information mentioned previously in this article, like your business name, location, management structure, and more.
File for Foreign Qualification (If Needed)
If your business plans on conducting business in multiple states, you'll need to file for foreign qualification. Every state you plan on doing business in (other than your home state) will require you to file a foreign business qualification.
By filing as a “foreign business,” you will stay compliant with each state that you decide to conduct business activity in.
Register With Any Federal Agencies
The only reason your business would need to register with federal government agencies is to trademark your business or brand name with the US Patent and Trademark office.
Also, if your business is a nonprofit corporation, you will need to register with the federal government to obtain a tax-exempt number that will offer certain tax benefits.
3. Get an EIN
An Employer Identification Number (EIN), known as a federal tax ID number, is used to identify businesses for tax purposes with the IRS.
An EIN is a nine-digit number that is assigned specifically to your business. Anytime you apply for a license or permit, open a bank business bank account, file tax returns, or apply for a business credit card you will be required to give your EIN.
You can use your EIN when opening a business bank account, and it will be required when filing taxes. You can apply for an EIN online, by fax, or by mail through the IRS.
4. Open a Business Bank Account
Personal banking accounts won't work for your business. You need to open a business bank account, so you can keep your personal and business finances separate.
This is especially important if your business is ever audited by the government and you are required to show a clear breakdown of your expenses and revenue. If you have one bank account for personal and business expenses, it will take you lots of time to go through each expense and separate them.
Applying for a business account helps you stay organized and makes it easy for the government to see how your business operates financially.
When applying for the account you will be required to give your EIN. Most banks will also require that you show proof of business registration, licenses, and permits.
You may also be asked to provide a detailed description of your business, management structure, and business goals.
Establishing a good relationship with your bank will help with future loans and credit applications and serve as a reliable bank reference in the future.
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5. Maintain Your Personal Business Credit
Although your business and personal credit are considered separate, they are both important to your business and can affect each other.
You should focus on building and maintaining good personal credit so it doesn't reflect negatively on your business. Creditors will often look at the owner's personal credit score when approving loans and lines of credit for small businesses.
There are a few key things you can do to maintain good personal credit, including:
- Pay all your bills on time
- Keep balances low on credit cards and other revolving credit accounts
- Only apply for new credit when necessary
- Check your credit report regularly for errors or signs of identity theft
By following these steps you can build a strong foundation of business credit that opens up future financial support.
6. Monitor and Manage Your Business and Personal Credit
The last step to building business credit is setting up automations and tracking tools that help you manage and monitor your business and personal credit.
There are three major business credit report agencies that each have their own way of monitoring and tracking your credit scores and history. One of the easiest ways to track everything is by using a credit monitoring tool that tracks your credit score, history, and all actions that are relevant to your account.
You can set up alerts that notify you whenever there is activity on your account or a change in your credit score. This way, you can stay on top of your credit and make sure everything all net-30 accounts and business credit card accounts are being reported accurately. It’s important to contact a credit agency if you see any inaccurate information on your credit score. Once you file a complaint, the agency will take a look and remove all false information.
The higher credit scores you achieve open up better business credit cards, interest rates, and repayment terms for any loans or lines of credit.
Frequently Asked Questions
How do you check a business credit score?
There are many online tools that allow you to check your credit score like Credit Karma or Credit Sesame. You can also use official credit score agencies like Equifax, Experian, and TransUnion.
What is a business credit profile?
A business credit profile is a detailed report of your business's credit history. This report includes your business' credit score, payment history, and public records. The report will also include any basic information about your business, like phone number, address, and business name.
How do you establish a credit profile?
Establishing a business credit profile involves picking a business structure, setting up foundational information, registering your business, getting an EIN, and opening a bank account. You must also continue to monitor and manage your credit so that your score stays high and your business is seen as reliable.
What credit score is needed for a business account?
Different lenders have different requirements, but typically you'll need a credit score of at least 650 to get a business account. Business credit cards will also require different credit scores to be approved. The most sought-after cards will require higher credit scores and better business credit profiles.