Building Business Credit

I’ve been meaning to write this post for a little while, and a comment on a previous post reminded me that it’s probably about time. I know a lot of business owners think that over the course of their business life, they will naturally build credit, and a lot of business owners are probably spread too thin to really focus on doing anything specific to building business credit. But, at least in the real estate investing world, credit is going to be key to opening a lot of doors and providing a lot of opportunity (as well as providing a safety net during those times when cash is tight). So, instead of just leaving the topic of business credit to chance, I’ve decided to do some research to figure how to build my credit, and am in the process of actually carrying out that effort.

Keep in mind that business credit is much different from personal credit. While you may have to secure any business credit against your personal assets for a couple years, the goal should be to build a strong enough credit history with your business that you are able to secure business credit only against your business assets, and not have to put your personal assets on the line. Additionally, in the real estate world, getting commercial credit lines — which don’t have the same qualification requirements and aren’t limited by your personal debt-to-income ratio or credit score — is one key to scaling an investment business.

Based on the research I’ve done (I highly recommend a site called Credit Boards that has a lot of great information), here is the 6 step process I would recommend to building credit for your business:

1) Create a Corporate Entity. This could be a full-fledged C-Corp, an S-Corp, or an LLC. The key is that you have created a legal entity separate from yourself and that can have a credit history and rating all to itself. There are a lot of differences between these types of business entities, and if you don’t know which one is most right for your specific business, talk to an accountant and an attorney to get some help.

2) Apply for an EIN. Once you have your business legally set up, you need to let the government and IRS know about your business. An EIN (Employer Identification Number) is analogous to a Social Security Number for your business. You can apply for an EIN free-of-charge online at the IRS website.

3) Get a Business Phone Line. This is actually an important step. The credit reporting agency that will likely be tracking your business credit (as well as the businesses that supply you credit) will want some proof that you are actually conducting business, and will also need a way to index your business in their databases. They do this using your business telephone number. In addition to just getting a business phone line, ensure that the business (and it’s associated phone number) are listed in both the 411 Directory (White Pages) and the Yellow Pages. Most phone companies that supply business lines will do this free-of-charge when you order your phone line. Because you need the Yellow Pages listing and the White Pages listing under the business name, you won’t be able to just get a residential phone line and call it a business line; and unfortunately, a business line will cost a little bit more.

3.5) Get a New Address (?) At this point, a lot of people will tell you that if you’re working out of your house, you need to set up a mail box (not a P.O. Box) at a local mailing center, so that your business doesn’t appear to be a home-based business. I’m not sure if this is a requirement or not, and have not set up an alternate mailing address as of yet. I want to see if I can skirt around this requirement…and will let you know if it works.

4) Apply for a DUNS Number. Dun & Bradstreet (D&B) is to the business world what Experian, TransUnion, and Equifax are to the personal credit world — they are the single biggest business credit reporting agency in the world. By going to their website or calling them, you can set up a D&B account and get an unique identifying number that will allow you to start building business credit through their credit databases. Beware that D&B will do their best to upsell you on tools to build your credit better and faster, and if that’s what you really want, go ahead and spend the money. But know that you don’t need to purchase any additional tools from D&B to start building your credit; that’s just how they make more money.

5) Open a Checking Account. Go to your preferred bank and tell them you want to open a business account. Try to find one that has few or no fees, if possible. They will ask for some details of your business, and will want to see your Articles of Incorporation and will need your EIN, so come prepared.

6) Start Applying for Credit. Get a business credit card (Amex and Advanta are highly recommended), open a Staples credit card, open a Dell business account, open a Home Depot account, or try opening business credit accounts at any of your preferred vendors and stores.

As you start building credit, you may notice that the stores/vendors stop requiring a personal guarantee for the credit lines. This is what you’re ultimately trying to accomplish — building business credit in the name of the business entity without impacting your personal credit or relying on it. Good luck…and I’ll provide an update in a couple months on how this is going for me…