I. Introduction
If you’re starting a business or running a small one, building a business credit history is essential. This credit history can help you access loans and funding, secure better terms with suppliers, and build your brand’s credibility. However, many business owners do not realize that they can quickly establish business credit using an EIN (Employer Identification Number).
In this article, we will break down how to start building business credit using EIN in a step-by-step guide. Additionally, we’ll cover the benefits of using EIN, share case studies of successful businesses that used EIN to establish credit, provide best practices for credit building, and compare and contrast other methods of building business credit with EIN.
II. Step-by-Step Guide
Establishing business credit with EIN involves the following steps:
1. Apply For An EIN Number
After deciding how you’ll structure your business entity, whether as an LLC or a corporation, you will need to apply for an EIN. You can apply easily online via the IRS website or file by mail or fax. Once you obtain your EIN, you can use it to build your business credit history.
2. Establish a Business Entity
The next step is to establish a business entity, separate from your personal credit, with the EIN. This step is critical as it separates personal finances from your business finances, makes accounting easier, and allows you to access business funding and loans.
3. Open a business bank account
After establishing your business entity, the next step is to open a business bank account. You’ll need your EIN and business documents to set up the account. Using a separate bank account for your business finances helps to keep your personal finances separate and build a credit history for the business.
4. Apply for Business Credit
The final step is to apply for business credit. Start with vendors that extend credit to businesses, such as office suppliers, equipment suppliers, and business credit cards. Always pay on time, building a history of on-time payments, and avoid missing payments. Over each payment period, you are building business credit. Eventually, you can graduate to larger financiers as your credit skyrockets.
III. Benefits of Using EIN
Using your EIN to establish business credit is advantageous for small businesses. Here are the most significant benefits of using your EIN:
1. Separating Personal and Business Finances
Separating business finances from personal finances is crucial for managing your cash flow and bookkeeping processes. Including your personal credit may also make it challenging to access funding and loans, as lenders and creditors will assess both personal and business credit history, ultimately leading to unfavorable terms. It’s essential to keep these financial profiles separate to minimize confusion, manage business credit better, and obtain more favorable terms for funding and loans.
2. Building Business Credit History
Starting to establish business credit early helps you build credit history. This history will aid in future funding, grants, and loan applications and help to ensure you get the best interest rates on financing. Nowadays, access to financing is vital to scaling up your business to the next level.
3. Establishing Credibility with Suppliers and Lenders
As your business builds its credit, it becomes more credible to lenders and business partners. Over time, as your credit score goes up, you can apply for larger loans and enjoy more favorable terms.
IV. Case Studies
Here are a few examples of successful businesses that used EIN to build up their business credit.
1. Business XYZ
XYZ has been in operation for five years, servicing the construction industry. The firm applied for and obtained an EIN in the early years of operation. With the EIN, they went ahead to incorporate the entity. They opened a business bank account and always paid on time. After an on-time payment history over several payment cycles, the business could access more significant finances from larger, more established financial institutions, helping them take their business to the next level.
2. Business ABC
ABC applied for an EIN and set-up a business entity since they planned to sell bespoke stationery for weddings. They opened up a business bank account and applied for a business credit card. They only used the credit card for their business and made on-time payments. As a result, they could establish enough of a business credit history to access a significant loan from a local credit union, allowing them to expand offerings and grow the entity at a faster rate.
V. Best Practices
Here are some tips that can help you get the most out of your business credit building efforts and avoid common mistakes.
1. Being organized with Financial Records
Keep clear, organized records of all business expenses, financial statements, and tax documentation. This will help you manage your business finances better, making it easier to present a clear picture of your business finances to potential lenders.
2. Making on-time Payments
On-time payment is crucial for a healthy business credit history. Ensure you pay vendors and creditors on time and avoid missing payments or falling behind on billing cycles. It can take six months or more of on-time payments to establish decent credit.
3. Limiting the Use of personal Credit
It is essential to build credit under your EIN, keeping it separate from personal credit. Using EIN credit could include business credit cards, business loans, or revolving credit lines from vendors who extend credit to business entities. It helps to build up credit without risking your personal credit score.
VI. Comparison Articles
In comparison to other methods of building business credit, here is a comparison of EIN:
1. Incorporation vs. Sole Proprietorship
Incorporating your business, in contrast to a sole proprietorship, allows you to establish legal separation between your business and personal finances. This separation allows building business credit under your EIN simple.
2. Secured vs. Unsecured Credit
Unsecured credit, typically obtained via smaller credit lines, does not require collateral. Conversely, secured credit is a type of financing that needs collateral. The benefit of unsecured credit is that one doesn’t need to have collateral, while the benefit of secured credit is that it allows you to get financing with a lower interest rate.
3. Personal Guarantees vs. Credit under the EIN
While personal guarantees serve as co-signs that hold each proprietor personally liable for business debt, it can be difficult to obtain, unnecessary and risky. At the same time, building credit under EIN helps to separate personal liability from the business, starting your credit building journey, and safeguarding personal finances against business complications.
VII. Conclusion
In conclusion, using EIN to build business credit has its advantages for your small business. By establishing a business entity, opening a business bank account, and making timely payments, you can build credit for your business, separate your business finances from personal finances, and establish credibility with potential business partners. Following best practices and avoiding common mistakes helps you establish a robust credit history and allows you to access loans and funding easier.
As seen from the case studies, businesses that use EIN to start building credit are successful, expanding, and growing. With EIN, your small business can gain credibility, making financing, grants, and loan applications a lot easier.
