When one starts and grows a business, it is very important to establish credit for the business to be able to obtain loans. These credit loans are essential for allowing one to meet expenses and grow sales, and with a line of credit, one can obtain more of them. Here are five tips startups can use to build business credit.
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What is Business Credit?
Much like how personal credit works, the credit is essentially similar to a virtual credit card that one can use for your business. Over time, as one takes out and pays back lines of credit, it will gain a good credit reputation. With a higher credit score, the business will be able to get more credit for capital expenses. This will allow for more growth and profits in the long term.
There are two types of lines of credit: secured and unsecured. A secured credit line requires a business to give some collateral as security for the credit, such as an asset or down payment.
According to Lantern Credit, these normally have lesser interest rates than their counterparts, unsecured lines, which do not require any security collateral. An unsecured business line of credit for startups from Lantern by SoFi will help any small company get off the ground.
Tips for Startups to Build Business Credit
Firstly, when a it gets registered, a structure type should be chosen. These include titles such as LLC, LLP, or a regular corporation. This will help determine the credit line it can get in the future as it grows.
Secondly, a startup entrepreneur should get a federal tax identification number from the Internal Revenue Service. The IRS has made it very easy for startups to obtain a tax ID number with a simple online tool. Later on, it can file their taxes with the same information that they receive from the website. A line of credit also comes from this tax identification information.
Thirdly, once a business is registered and has a tax ID, the next step is to open a business bank account. This is where all of the startup’s finances will be located. It is extremely important not to skip this step, as this is what creates the barrier between personal and finances. Blurring that line can invite fraud charges from authorities down the road.
Fourthly, the most important step to establishing a business line of credit happens. When capital purchases for the business are made, the amount that is spent and paid is sent to a credit reporting agency, which will then provide a credit score for the business.
Finally, after the line of credit is established, a owner must monitor the line to make sure all payments get through in time. Additionally, if any information changes, the owner is obligated to report it to the credit agency.
With a line of credit, a startup can have the funds it needs to make essential purchases and grow into a profitable enterprise.
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