How to establish good business credit as a single parent is a catch-22 situation as your new business will not get a loan from the bank without your personal credit history taken into consideration and your personal credit cannot be transferred to your LLC or corporation as they are legally separate. Most sole proprietors start off using their own credit history in order to start getting a loan and then transfer that to the LLC in order for books and cash flow to reflect a management that keeps its promises on debt repayment. A strong credit history is the foundation of any good business credit for single parents and it is very important to keep your creditors at bay when you start a new business because it will inevitably mean the success or failure of the business. But it is difficult to get a good credit history if nobody will give you a loan to start off with so you have to do it one step at a time.
How To Establish Good Business Credit For Single Parents
Set Up A Business Entity
The first step is to setup a business entity because there is no such thing as a business loan or business credit for a sole proprietor, that is called a personal loan. In order to receive a business loan you have to separate the business from its owners by setting up a legal business entity which is a corporation or an LLC. Your CPA can advise you on the best legal structure that you should register depending on the business that you are in, but the choice is important as it can have a big impact on the tax implications that you will be liable for.
Obtain Your Tax ID
You then need to get a Tax ID (EIN) which is the same as having an individual social security number but this is for your company and not your personal self who needs to be kept separate at all times. This EIN number is vitally important as you will use this number to setup a bank account and build your credit profile, you can apply for an EIN number online at the IRS website which will explain all the details. After you have set up your bank account with the bank you then need to make the first step of applying for a loan which you cannot do without a reference which has to be at least two years old. Before applying for a loan however you need to make sure that your new business bank account shows a cash flow capable of handing a debt and the optimum daily balance of your account will depend on the type of business you are in as well as the amount of money you will be seeking.
Get Registered With The Business Credit Bureaus
You also need to get registered with business credit bureaus, they are all free to apply for but the important thing is the that your DB or DUNS number is now attached to your EIN number and that will have a credit score associated with it and this credit profile number is what will allow you to take a business loan as well as the amount of interest that you most likely be ask to pay for the loan. You can check that your trade vendors are reporting your payment history to one of the major reporting companies; this is a vitally important part of developing a good credit history as it will reflect immediately how many vendors report your good payment history. The problem is that a lot of small vendors do not report these payments but you can be proactive and compile your own trade reference sheet which has at least three references which will help a lot in your credit report on your business, and this reference sheet can only re-enforce your good business credit for single parents.
Business Credit Card
It is also good to open a credit card in the name of the business and to use it very wisely and always pay the minimum required at least as this will help you develop the good credit score that you need. Your own personal credit rating is going to be linked to the company for the first few years of a new start of a small company.
The creditors will be looking at the credit score of the owner and any shareholders and see what standing they are. It is important to remember is that you can’t build good business credit for single parents overnight. Business owners should think about their business credit from day one. Even if you’re self-funded now, you never know what challenges or growth opportunities will develop down the road. Having access to credit can only help you adapt to changing conditions and position yourself for success.
When trying to improve your credit profile and your credit score you should take the time to write to three or four of the most important credit bureaus which are TransUnion, Experian and XDS as well as DB and you should ask for a copy of your companies credit report at least every six months which you will not have to pay for. The information will tell you a lot about the way your score changes depending on the response you have to your debt and the amount of payments that have been made. As a single parent, it is all very relevant information to help you improve your credit history and the most important aspect of the report is to be able to check that you agree with all the entries because it is vital that you take action immediately if you do not agree.
Whether you are working through a debt counselor or not is completely irrelevant when it comes to the reporting of the credit bureaus but what can make a difference is the report you get from your creditors who will have a lot to say if you are not paying. But if you have someone other than yourself who can approach them and negotiate on your behalf it might be worthwhile as the creditor will then be able to see a solution to the problem. Often a good debt or credit counselor will be able to get the creditor to reduce the interest as he is then able to show that payments are being made on a regular basis.