How To Establish Yourself As A Real Small Business And Obtain Business Credit

Prior to the recent U.S. recession, many of us were busy along our career paths with very little thought as to our own job security. Housing prices were way up as well as the stock market – and any drastic change to change that trend was unforeseen.

You did your job, ran your errands, shuttled the kids around, ate dinner, and settled into some downtime. The amount of downtime each of has varies from person-to-person… as do the activities we choose.

My “downtime” consisted of putting myself into a position to become an LLC. from my diverse interests as well as some of the businesses services and consulting I was involved in addition to my full-time position.

But for all practical purposes, it was a hobby… but a productive one.

In 2008, I opened my LLC. My next area of focus was extracting my personal expenses from my business (co-mingling) and perhaps even opening up a small line of credit for my business. I wanted the business community, especially the people I networked, to see my business as not merely just an extension of myself, but its own business entity.

But, how to do this? How does one obtain credit for their small business?

How To Obtain Small Business Credit

Step 1: Incorporate — How you decide to structure your business is very important here. Without doing this step correctly, you might as well stop reading and forget about building business credit. Your business MUST be a business that is a separate legal entity from you. It cannot be a sole proprietorship or regular partnership since those are not separate legal entities. No, the business must be either a corporation or a limited liability company (LLC).

By creating a separate entity, you allow your business to have a legal structure and credit rating apart from, and different than, your own.

Step 2:  An Employer Identification Number — This is a number issued by the IRS and the business equivalent of a Social Security number. If you don’t have one, get an EIN from the IRS. I have enclosed the link for you. It is very easy to apply for one and if I remember correctly, received it immediately!

Step 3: A DUNS Number — This is issued by the main adjudicator of business credit, Dun & Bradstreet. A DUNS number is your business’ credit profile number.

D-U-N-S Number assignment is FREE for all businesses required to register with the US Federal government for contracts or grants.

Step 4: Bookkeeping — One of the challenges of many new business owners is determining how their financial records will be maintained and by whom. Poor record keeping will lead to a real nightmare at tax time and a great deal of difficulty of lenders determining the financial condition of your business.

When choosing a bookkeeper, be weary of people who make guarantees that you will look like a wealthy business and not have any tax liability at the same time.

Step 5: Business Banking — Go to the bank and open up two accounts: The first is a standard checking account. Again, this must be separate from your own personal checking account. Create it using the business name, EIN, DUNS number, business address, and so on.

Second, open up a savings account or CD tied to the business checking account. Put some money in it!

And do not bounce checks! Often, the fee structure to businesses is higher than that of a consumer account.

Step 6:  Obtain Vendor Credit —  Once you have all of your numbers and accounts in place, you can begin the actual process of building your business credit profile. Begin with the phone company – put your business phone number in the name of your business, and not you personally. If you have utility bills through your business, do the same thing.

See if your local office supply store will give your business a small credit line in the name of the business. Maybe one of your suppliers or vendors will do the same.

Step 7:  Get A Loan — Use that bank savings account or CD to obtain a small loan from the bank again, in the name of the business. By securing the loan with the business savings account, you: 1) give the bank every reason to say yes to your loan request, and 2) really begin to build business credit by showing that you received and are repaying a business loan from a bank.

Step 8: Pay On Time — Repay all of this credit you ask for on time, and in full.

The Next Level And Beyond

Hire Employees — Nothing says real growth like adding employees.

Business Plan — A real business owner has a real business plan. Having a professionally prepared business plan is your key to taking your bank to the next level… debt! Seriously, I am referring to financing. It’s borrowing at a low to create a high rate of return. You pay your loan expense and profit the rest. Genius!

Physical Location — Those of you “basement warriors” or with the beautiful “home office,” there’s nothing like the look on a Loan Officer’s face when your new business is decked out in new furniture, well lit and employees are buzzing about.

In Closing

Before you know it, your business will have a strong track record and solid business credit rating. You can then use that to gain additional business credit as necessary… such as a business credit card.

These were the steps I took to legitimize my small business… and it wasn’t hard. Since I have incorporated a lot of business ideas along with my primary business and also network with a lot of like-minded business people, it is important that others feel my business was built on a good foundation.

As others should feel about your business.