A Business Credit Guide
If you are interested in establishing credit for your new business, it is best to set your business up as a corporation, and then establish credit in the name of the corporation. A corporation is a separate legal entity that can stand on its own as far as credit viability is concerned.
A corporation can be set up as a “C” corporation where it has its own tax bracket and is considered to be a separate individual as far as all business, liability concerns and credit issues are concerned.
A corporation can also be set up as a limited liability company, where the entity is still a corporation as far as liability, separation of identity, and credit, but it offers the choice of being taxed as a corporate entity, a partnership or as a pass-through arrangement where the taxation falls into an individual’s tax bracket. Many people start out with an individual taxation arrangement simply because it is easier, yet all of the other benefits of incorporating still hold true.
How to start off on the right foot
It is possible to start out on the right foot by borrowing some money in the name of the corporation, and then paying it back on a timely basis, just to establish a track record of the credit worthiness of the company.
You could apply for a line of credit from your bank, borrow some of the money, then start paying it back which will accomplish the same thing.
Dunn and Bradstreet is a credit reporting organization which may approach you in regard to some of their services. Although they do offer a lot of good advice in this area, and the Dunn & Bradstreet rating carries a lot of weight in the business world.
You can also buy a CD from a bank, and then take out a line of credit with that bank. This will also add to your record of borrowing capital, and then having the ability of paying it back. What you are doing is simply establishing a track record that tells the credit reporting agencies that XYZ company is a good credit risk. The three credit reporting agencies of Equifax, Experian, and TransUnion all record pretty much the same information, but as you progress it will be valuable information.
It would be an ideal world where a business could get off the ground without the need for borrowing any type of working capital at all. However, business needs of expanding inventory to capture market share, payroll needs, and other day to day requirements are all able to be accomplished in a much easier way with a well-managed business credit situation.
If you can establish a relationship with a local bank, that is the best way to handle this, as the bank will be able to work hand-in-hand with you as you build your credit profile.
You should beware of the proliferation of the online “quick-to-loan” entities because their interest rates are very high, sometimes in the 25 to 30 percent range. If the money is too easy to get, it may end up as a bad experience. Work with somebody on a local basis if you can.
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