The Importance of Small Business Credit and How to Build it.

By: Michael | Published: July 23, 2010 | Filed under: Entrepreneurs, Small Business Advice

Obtaining a line of business credit as a startup can be crucial to acquiring credit down the line when you need it most. One of the simplest ways to do this is to open a small business credit card to help you build credit for your new company.

Establishing credit for your business is essential because it is what will be used as a determining factor of trust when you need terms, or even merchant processing. If you are looking to accept credit card payments for your business, your company credit will come under scrutiny. Not having credit established can be a determining factor that prevents you from gaining this privilege.

So how do you start building credit as a startup? The best place to start is by leveraging your existing connections. A key example of this is your personal bank. If you have a relationship with the bank that you do your personal finances with, you can approach them to discuss opening a business account and a business credit card. Note well, that you will need to differentiate your business credit cards from your personal ones by applying with your Employer ID Number (or EIN.) If you do not have an EIN already, you can quickly obtain one from the IRS by visiting: http://IRS.gov and searching for “ein.” it’s a very simple application process and your number will be issued instantly.

Another fantastic starting point for business credit cards is store credit cards. Stores like Staples offer business credit cards with low limits that are often easy to obtain. It is essential that, as with all credit cards, you pay your balances off on time. This is especially true for your initial cards where your credit can highly be impacted by small things like this. Between demonstrating a solid on-time payment history with these cards, and obtaining a card from your bank, you are well on your way to building your business credit.

The goal of building business credit is to do so without having to offer a personal guarantee and bring your own personal credit score into the equation. Ideally, you don’t want there to be a negative lashback to your personal score if something goes wrong with your business. While this should be avoided as much as possible, it is slowly getting harder and harder to acquire initial business credit. If all else fails, lock down a small line of credit with a personal guarantee and only use it for the purpose of building credit. Make small purchases on it that you know you will be able to pay off promptly. A few months down the line, attempt to get another card without the PG. If you are approved, stop using, but do not close, the card that you have the guarantee on. Just like with personal cards, it is very important to keep your oldest card open and maintain as much unused credit as possible.

Most of the rules of personal credit, apply for business credit as well. Two of the most common being not to apply for numerous cards within a short period of time, and avoid being declined for a card, as these will negatively affect your score. Scatter the time between applying for cards, and inquire as to the minimum requirements as much as possible before you apply to a card. If you realize you don’t qualify, you can prevent having the decline appear on your credit score by waiting until you are more qualified to apply.