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Now that you’ve formed your LLC, you’ll probably want to establish business credit for your company. It’s crucial for you to know the difference between true “business credit” and business loans that you’re personally liable on.
Not All Credit is the Same
First, once you form your LLC, it will receive all kinds of solicitations for credit cards for your business. When I formed an LLC a few years ago, within a few weeks I had an offer for a Quicken Business credit card in my mailbox. I don’t even know if I had opened a bank account for the business yet.
This credit card, however, was not business credit. If you read the fine print carefully you will find that you are personally liable on this credit card. Meaning, that if the company doesn’t pay the bill, then you will have to.
This is not true business credit.
True business credit is a loan, line of credit, credit card, etc. to which you owe no personal liability. If your company can’t pay, then the creditor is out of luck and you are off the hook.
Most credit for an LLC is based on the personal credit of the owner which is personally guaranteed. Especially true for a new LLC, the credit score of the business owners as much if not more important than the business idea.
Needless to say, business credit isn’t easy to get. But it can be done.
Five Steps to Building Business Credit
What you need to do is build a credit history for your business just like you did for yourself, personally. Check out these five tips to establishing business credit:
- Open an LLC credit card in the business’s name and Employer Identification Number (EIN). Yes, you will be personally liable on your first business credit card. It’s almost unheard of for a brand-new company to get a credit card without the owner personally signing and guaranteeing payment.
- Only use the card for purchases you know the business can pay. For example, toner and paper for your printer and other office supplies. In other words, small purchases. Use it every month, because this will establish a consistent history. Always make the minimum payment on time (you’re trying to build a good credit history).
- Get a D&B number and account. D&B (Dun and Bradstreet) is a essentially a credit reporting company for businesses. They’ll ask for a lot of data, some of which you need to give (like name and address), and some you don’t (detailed financial statements). Over time you can build a business credit report which vendors will use when making decisions as to whether to grant the entity credit.
- Pay all your suppliers on time. This is pretty self-explanatory. Don’t string suppliers out longer than agreed to. If the contract is 60 days, pay by day 60.
- Make sure your suppliers report your good behavior to D&Bin order to improve your business credit score. Most companies only go to D&B when their customers don’t pay (D&B does collections). Encourage them to report your good payment history as well.
- Ask your bank for a credit card without a personal guarantee. If you have too small a bank balance, you probably won’t get one. However, if you have a decent bank balance and you are willing to accept a lower credit line, then you can get a card in the business’ name without a personal guarantee. This is the first taste of business credit, and it will only grow from here.