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When you start a new business, you also begin a separate financial life — for better or worse. When you use your personal credit profile to obtain credit for your new business, you risk piercing the “corporate veil” (the legal term for the separation between your business and personal finance), limit the amount of funding the business can get, and may put your personal assets in jeopardy if the business fails. Is it worth it?
Not necessarily. It’s much better to establish new credit for your new business. To establish credit for your business, you’ll want to apply for credit that requires “no personal guarantee.” But then you may find yourself with the same challenges you may have faced in your early 20s: How can you find someone to extend credit to the business if the business doesn’t have a credit history?
The answer is very similar to the way you began establishing credit as a young adult, with a few added steps that come with being a business owner.
1. Incorporate your business or establish an LLC.
2. Apply for a Tax ID Number (a TIN) or, if you have employees, an Employer Identification Number (EIN). These two numbers are essentially the same, and function to identify a corporation for tax purposes, the way a Social Security Number identifies you as an individual.
3. Apply for a DUNS number and set up a Dun & Bradstreet profile. This profile is used to verify the credit history of a business — similar to the way your FICO credit score measures an individual’s creditworthiness.
4. File all necessary business licenses and paperwork to do business legally in your state.
5. Get a business listing in the Yellow Pages. In today’s Internet age, this may seem silly but is required for a business checking account and to build credit and establish yourself as a legitimate business.
6. Set up a business bank account — it’s important to keep your business and personal accounts separate.
Individuals may start building their credit profile with secured credit cards or store credit cards, which are easy to obtain. Businesses can establish credit profiles in similar ways.
Building Lines of Credit with Vendors
Businesses can begin establishing lines of credit with vendors. Some vendors offer terms of Net-30, Net-60 or Net-90, giving you time to gain cash flow before you pay for the business purchases you need. Pay your bills on time to establish a credit history, and make sure your on-time payments are being reported to D&B and other credit agencies, like Experian.
Once you’ve built up credit under your business name, you should be able to apply for an unsecured business credit card requiring no personal guarantee. I currently recommend the American Express Open Plum card.
Just as individuals can get secured credit cards, you can get secured business credit cards from companies like Wells Fargo Bank and Bank of America. These cards may:
- Require a security deposit
- Have higher interest rates than unsecured cards
- Carry an annual fee
In some cases, your credit limit may be higher than your security deposit, providing additional credit for your business, and secured business cards may also have benefits not offered on secured personal credit cards, like purchase protection, identity theft protection and more.
A secured business credit card may not be the best option. If you can build your business credit in other ways and then obtain a starter business credit card, that’s best.
A third option to build credit for a new business also exists.
You can get a business credit card in your business name, separate from your personal credit, but using your personal credit as leverage. Contact your current credit card issuer and ask if they would extend a credit line on a separate business card.
With a “personal guarantee” and your established individual credit history, you may be entitled to lower interest rates, higher credit limits, and even Rewards cards from top credit card issuers like Discover, American Express and Chase. It’s much better to protect your personal assets by establishing a separate business credit history — leveraging your personal credit to build business credit may not be the best way to do so, but it is an option.