Establishing business credit for the first time


Mark Frohman


Business Columnist

Monday, March 4, 2019

Why is business credit important?

For business owners, having a separate legal entity, such as a corporation or limited liability company, provides the opportunity to create a credit identity with business credit reporting agencies, also known as a business credit profile. A credit profile is important because it is used by credit grantors to determine whether to extend credit to a business.

Before establishing business credit, the first step is to set up your business as a separate legal entity. Next, you need to apply for a tax identification number, or EIN. This is the number used to identify a business for tax reporting purposes.

Next, apply for credit in your company’s name. Here are the basic types of business credit you can apply for.

■ Vendor Credit: Vendor credit is when an individual or business offers products or services that your company can purchase on short term financing (typically net 30 terms). Many vendors are willing to extend credit to startups with minimal requirements. In some cases, a vendor may require an initial purchase or deposit prior to extending credit terms.

■ Supplier Credit: This type of business credit is when a supplier is willing to provide supplies to your business and defer the payment for a later date. This type of financing is great for conserving cash because it gives you time to sell the products you receive from the supplier before having to pay for them.

■ Retail Credit: Many small and major brand retailers offer store credit cards for businesses. Unless they’re co-branded, the card can only be used in a specific store. This type of business credit may make sense if there is a specific store you regularly use for business purchases.

■ Service Credit: The easiest form of business credit you can establish for the first time is service credit. Your internet, cell phone, cable, satellite TV, web hosting and other utility services are all agreements your company makes with providers.

■ Business Credit Cards: One of the most important tools to keep your personal and business purchases separate is a secured or unsecured business credit card. It’s essential that you apply for a business credit card that reports only to the business credit agencies so you protect your personal credit as well.

By establishing business credit, banks, lenders, suppliers, insurers and investors will be able to better judge the viability and creditworthiness of your business. Ultimately, your business credit report will influence the amount of credit, payment terms, interest rates and insurance premiums your business will pay.

Mark Frohman is the owner of Frohman Consulting Corp. and a counselor with SCORE, a nonprofit business-consulting group, which named him the 2018 Top Counselor Award for the Raleigh chapter.