Most new businesses start with working capital, but no credit. Establishing credit is extremely important to your business. Banks and lenders take credit history into account when deciding whether to issue a loan along with the interest rate and credit terms. Suppliers negotiate payment conditions based upon a business’ credit. Good business credit could mean the difference between C.O.D. versus 30/60/90 day payment terms. Potential business partners also assess the risk of doing business with your company based upon credit. There are some basic steps a new company can take to establish their credit.

The first thing you need to do is incorporate—or form a Limited Liability Company (LLC). By incorporating your business, you separate yourself financially and legally from company. While sole proprietors are considered “companies” that are in business, they are still personally liable (legally and financially) for what their business does. At this point you must also obtain all necessary business licenses and permits required by State and County laws and Municipal ordinances.Next, you need to obtain a Federal Employment Identification Number (EIN) from the I.R.S. for your newly formed corporation—or LLC. A Federal EIN is a taxpayer identification number for your business. Using this information, you will then be able to open up business bank accounts, rent commercial space, and set up separate phone lines under your business name. Once you have taken these steps then you can begin to establish separate business credit. According to an article written by the Small Business Administration and Dun & Bradstreet in January 2008, businesses should begin establishing credit by:

1. Starting a business credit file
2. Establishing credit history by using your business name for expenses
3. Paying bills on time
4. Monitoring your business credit file; and
5. Knowing the credit standing of your customers and suppliers.

For more information go to:

http://www.reuters.com/article/pressRelease/idUS157619+09-Jan-2008+PRN20080109 http://www.sba.gov/http://www.irs.gov/businesses/small/article/0,,id=98350,00.html

Let me put these recommendations into a practical perspective by sharing a snapshot of how we started our first business—LargieDM, LLC. First, the business was capitalized with $20,000.00 withdrawn from a 401(k) account. Except as a last resort, I would not recommend using retirement funds to start a business because there is a tax penalty for earlier withdrawal. Next we took all the necessary steps to form an LLC, get proper licensing, insurance, and set up the commercial bank accounts. At this point, we reached out to a several key suppliers and vendors to establish credit terms so that we would not need cash on delivery for each new marketing project. This step is essential to any new business with project overhead and cash flow constraints. We also decided earlier on to be very selective in our clients. Remember the business maxim: 20% of your customers make up 80% of your business revenues. More than a few times, we conducted credit checks of our own before accepting a new client project. A dozen good paying client relationships can make or break a business. We then started a credit file with Dun & Bradstreet (along with the Credit Bureaus—TransUnion, Equifax, and Experian). We also opened up two business credit card accounts with American Express and Visa. We have gone to great lengths to pay our business bills on time and not to run up the corporate credit lines. Since our company has now been in business for two years, we are going to apply for an unsecured small business line of credit with our local bank to increase our cash flow capability for bigger projects. So far so good… stay tuned to find about the line of credit.

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