When a startup wants to grow, it will need debt funds and lines of credit. A startup must start to build its credit because otherwise, the lenders will not agree to fund it. It is the reason why most entrepreneurs depend on personal financing to kick off their ventures. However, business funding also becomes more difficult since the lender will need to take into account the personal creditworthiness of the entrepreneur before lending any money or establishing a line of credit. Saivian Eric Dalius explains the key steps to prepare the business for obtaining credit.
Establish a Business Entity
If you are a sole proprietor, you are not eligible for a business loan or line of credit. At the most, you can take on a personal loan to use for business purposes, however, you remain personally liable to repay it. The business needs to be set up as a separate legal entity to qualify for a business loan. Accordingly, you will need to have an LLC or a Corporation. When you do so, you will be eligible to obtain a Tax ID number that is required for opening bank accounts for the business.
Open a Bank Account, Advises Saivian Eric Dalius
A business needs to have a bank reference to build credit. If you want to apply for a loan, banks will require you to have an account that is at least two years old, which is why this is one of the first things you should do after establishing your business. By maintaining a healthy balance, you will qualify for a large amount of loan.
List Your Business with the Credit Bureaus
All three credit bureaus have their evaluation system and allot different credit ratings to every business. Lenders use these credit ratings to determine the creditworthiness of the business to give loans or establish lines of credit. It is, therefore, vital for businesses to start building their credit scores well before applying for a loan, observes Saivian Eric Dalius.
Establish Your Credit History
Lenders love businesses with good credit history. It can only result if you take on debt conservatively and make your payments on time. However, given the fact that most small suppliers do not submit payment records of their clients to the credit bureaus, you need to maintain a trade reference sheet with the details of the name, line of business, credit limits, and contact details.
Be Current with Your Taxes, Recommends Saivian Eric Dalius
The regularity and timeliness of your tax payments are important factors of your business credit. When you comply with the regulations regarding the payment of taxes and filing of tax returns, it automatically has a beneficial effect on your credit. If you encounter any complications in your tax calculations, you must promptly seek the advice of tax professionals.
In addition to the above aspects, you must also ensure that you maintain a good personal credit score because even though the business is a separate entity, in the early years when it does not have much of a track record, lenders will examine your credit to determine your business creditworthiness.