If you haven’t borrowed money from a bank before, you might be a credit ghost. Credit bureaus use this term to refer to people who don’t have recent loans recorded on their credit reports. As a result, they can’t give banks information that they need to predict whether you’re likely to repay a loan. So if you do need to take out a loan, the bank might charge you a higher interest rate or even refuse to give you a loan.
But a business can be a credit ghost as well. Small businesses often do not have credit histories. Credit bureaus separate your personal credit history from your business credit history, so personal loans don’t build business credit. And if you plan to take out a loan for your business, the bank will want to see both types of credit history. That could be a problem if your business hasn’t established a credit history yet. Here are a few ways for your business to start building its credit history.
Establishing a Start Date for Your Business
The bank will ask you when you began operating your business when you apply for a loan. If you’ve been in business for a longer amount of time, it’s less risky to loan you money. One way to provide this start date is by providing the date when you received an employer identification number from the IRS. You can obtain an EIN on the IRS website. If you’re operating your business as a sole proprietorship, you can still ask the IRS for an EIN for your business.
If you’re operating your business as a LLC, you can also use the date when you incorporated the LLC as the official start date for your business. To incorporate your business, you have to register your company as a corporation with your state’s secretary of state. If the state accepts the application, it will send you a copy of the certificate of incorporation afterward. For example, here is how to register your corporation in Georgia.
Setting Up a Business Bank Account
If you want to take out business loans instead of personal loans, you’ll need to set up a business bank account. It will be easier to borrow money from a bank if you’re taking out a loan from the same bank that provides this account. For example, Citi offers lines of credit to small businesses but these credit lines are only available to customers who have business bank accounts with Citi. Citi also requires small business owners to personally guarantee the loans for their businesses, and that’s also a normal requirement for small business loans.
Using Trade Credit Effectively
You can build a business credit history by making purchases from vendors that offer you net 30 payment terms. Under those terms, you have to pay your invoice from these vendors within 30 days. Since you’re taking out a short-term loan when you make these purchases, the vendors report these transactions to credit bureaus and that helps you build your business credit. Tipalti provides a list of companies that offer net 30 credit terms and this list includes both Amazon and Wal-Mart as well as other retail stores that sell office supplies.
Small business owners search for vendors that offer net 30 credit terms because you can use them to build business credit without obtaining a business credit card or a line of credit from a bank. Retail stores have an incentive to make loans to their customers because their customers will spend more money. As a result, you can often obtain trade credit from a retailer even if a bank won’t allow your business to take out a longer-term loan. Trade credit isn’t available from all retail stores, though, so it’s important to check whether a store offers net 30 terms before you shop there.
Net 30 programs are also separate from a retail store’s consumer operations. Your business will have to provide additional information to the retail store to qualify for trade credit offers. For example, you might have to provide your EIN to the retailer to sign up for the program. And you should be using your business payment card to make purchases through the program, so you should have a business bank account already. So this step comes after the previous two steps in establishing your business credit history.
Trade Credit Solves the Credit Ghost Problem
Your business can avoid becoming a credit ghost by using trade credit to establish a vendor payment history, although this requires some additional set-up work beforehand to establish your business as a separate entity. By showing the bank that you can repay short-term loans from vendors, you can prove that your business is a good credit risk if you need to borrow money later. It’s a good idea to establish a business credit history before your business needs to take out a loan, but that doesn’t mean that your business has to pay interest on unneeded loans. Net 30 vendors don’t charge any interest if you pay your invoice within 30 days.