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How a new startup can begin to build credit

Posted by Kanika Sinha

May 9, 2016

As a startup, you are most likely concentrating your financial efforts on obtaining venture capital.

At the same time, we bet you are spending some of your own money.

This is why it’s so important to build your business credit from the very beginning of your startup. It’s much easier to build your credit than it is to repair it once it’s gone south.

As a new startup, you might find the world of financial lending an unfriendly place. Perhaps you’ve been told they will only lend you money once you’ve proven yourself and have an acceptable credit history.

It's a good idea to put some effort into building your credit from the start. In this article, we look at how a new startup can begin to build credit.

#1: Create a business entity

Visit with an accountant to decide if you should incorporate your startup. Consider a C Corporation, S Corporation, or LLC. You want to visit with your accountant because how you decide to do this impacts your taxes.

This is your very first step when building credit. It establishes your startup as a legal entity. Plus, when you create a business entity, you also separate your business and personal financial accounts.

A side note: a sole proprietorship can’t apply for a business loan or establish business credit. With this type of setup, you can only get a personal loan.

#2: Sign up for a tax number

The next step is to get an EIN (employee identification number) for your startup. This is the tax ID number for your business. Think of it as the social security number for your business.

When opening your startup bank account, you’ll need this number. If you’re applying on your own, visit the IRS website.

#3: Open a bank account

Mixing personal and business accounts is a bad idea, so set up a bank account for your startup. This is also a good way for lenders to see that you are serious about your business, and that you can manage your account.

You’ll need the EIN before you open your startup’s bank account. If you’ve used a particular bank for your personal finances, go ahead and use them to set up your business account. This might help you obtain business credit cards and lines of credit.

#4: Get a business credit card

Unless you have success with your own bank in getting a business credit card, it can be hard to get approval because your startup has no credit history.

Another option is to open a secured credit card with your own money. Many banks offer this option, and your limit will be what you put on the card. Once the card starts reporting to the credit bureaus, you’re on your way to establishing credit.

#5: Get listed with the business credit bureaus

You want to get a DUNS number from Dun & Bradstreet – this is used to establish your business credit file. This is what lenders use to determine your credit worthiness.

You can get this number for free, while also using Dun & Bradstreet’s paid services and credit building programs.

You also want to look at the main business credit bureaus, Equifax and Experian. Get a report from them and make sure your business, name, address, and phone number are listed on all of the major credit directories. This is where you’ll see your credit card history listed, which can be a good source of positive credit.

Remember – the more creditors who report a good payment history, the better your credit.

#6: Establish lines of credit

Consider opening credit lines with retailers and suppliers. You want to request a net-30 credit option. This in turn helps you build credit if you pay your accounts on time.

Aim to apply for at least five lines of credit, but don’t apply for everything all at once. Spread your applications out over several weeks.

#7: Pay your taxes

Always pay your taxes on time, and always pay what you owe. This is a great way to build your business credit.

#8: Pay on time, all the time

Once you’ve gone through all the steps above, this is the one that really counts. It is the only path to building credit for your startup.

Final thoughts

We encourage you to begin to build credit for your startup from the very beginning. Why?

Because, while it may be tempting to lean on your own personal credit to fund your startup, this can spell problems for you later on. If you use your own personal credit, you are tying up your loans, mortgage, personal credit cards and perhaps your car.

If you have startup problems, using your own personal credit can make it hard for you to get personal loans.

When you start to build startup credit, you completely separate your business from your personal accounts. This makes your startup credit dependent on your company’s payment history, assets and cash flow. It doesn’t look at your personal financial obligations.

Start building your startup credit now, because your success depends on it. It gives you security and the ability to separate the personal from the business.

Are you a new startup? Are you looking to get your new business off the ground and watch it rise to success? We are here for you. We can help answer your questions and guide you through the process. Outsource your finances, payroll, HR duties and more to us. Contact Escalon today to get started.

Image: Francesco Gallaroti


Kanika Sinha
Kanika Sinha

Kanika is an enthusiastic content writer who craves to push the boundaries and explore uncharted territories. With her exceptional writing skills and in-depth knowledge of business-to-business dynamics, she creates compelling narratives that help businesses achieve tangible ROI. When not hunched over the keyboard, you can find her sweating it out in the gym, or indulging in a marathon of adorable movies with her young son.

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