- Why is it so hard to build business credit with just your EIN?
- Should you act as your business’s guarantor?
- How to build business credit with EIN
- Build business credit with one of Alliance’s Virtual Offices
Q: How can I build my business credit starting from zero? Should I take on personal liability to jumpstart the process?
A: There are many ways to build business credit from zero, but you should do everything in your power to avoid taking on personal liability for your business.
Starting a business is easier than ever before.
With tools like Virtual Offices and automated bookkeeping and payroll services, entrepreneurs can register an LLC, hire employees, and run operations entirely from the comfort of their homes.
Despite this streamlined approach to business ownership, there’s a lot that modern business owners aren’t as familiar with.
According to the U.S. Small Business Administration, 27% of businesses surveyed of small businesses use personal credit cards and neglect to correctly separate their personal and business expenses.
Another surprising statistic from the same SBA posting is that nearly 50% of small businesses use personal credit cards and neglect to properly separate their personal and business expenses.
If you fall into either of these categories, it isn’t too late, but you need to focus on how you can build your business’s credit while keeping your personal credit separate.
Your EIN, or employer identification number, is your business’s social security number. To get this number, all you must do is go to the IRS website, pick your entity type (LLC, sole proprietorship, etc.), then fill out the provided form.
When this is done, you can start building business credit with EIN to secure your business’s future.
In this article, we’ll discuss why it’s so difficult to build business credit with your EIN alone, whether you should act as your company’s guarantor, how to build business credit with EIN, and finally, how you can use Alliance’s Virtual Offices to help bolster that credit.
So, if you’ve ever searched for “how to build business credit with EIN number?” – you’re in the right spot. Keep reading to see how you can build business credit using EIN without risking personal liability!
- Why is it so hard to build business credit with just your EIN?
- Should you act as your business’s guarantor?
- How to build business credit with EIN
- Build business credit with one of Alliance’s Virtual Offices
Why is it so hard to build business credit for a new business?
Before we get started, let’s ask, what is business credit?
Your EIN is essentially your business’s social security number. In the same way that personal credit is tied to your SSN, your business’s credit is tied to its employer identification number.
Just like it’s difficult to build personal credit when you’re starting from zero, the same principles apply to new businesses.
When you start without any credit, it can be tempting to use personal credit to help jumpstart the process, but learning how to build business credit with EIN only is paramount to your company’s long-term success.
Read more: How to Build Business Credit: Building Credit for Your Small Business
Below, we’ve put together a list of some of the reasons that building business credit with a new company is so difficult.
- Lack of credit history
- Uncertainty of business success
- Limited assets
- Industry risk
- Regulatory requirements
Lack of credit history
One of the main reasons banks hesitate to give a new business a loan or line of credit without a personal guarantor is due to a lack of credit history.
Just like when you’re getting your first credit card, it’s harder to convince lenders that you’re trustworthy when you don’t have any evidence supporting that fact to back you up.
Without a track record of financial responsibility, the bank may view the business as a higher risk and may require a personal guarantee to ensure that the loan will be repaid.
Essentially, the reason a lack of business credit history is harmful boils down to a lack of information that creditors and lenders can use to determine your ability to repay debts.
Lenders typically use credit reports, scores, and payment history to assess your business’s risk compared to their risk tolerance. With no or minimal history, it becomes difficult, if not impossible, for creditors to handle this risk assessment.
Uncertainty of business success
Banks may also be hesitant to lend to a new business without a personal guarantor due to the uncertainty of the business’s success. Like the lack of credit history, a lack of information makes it infinitely more difficult to determine whether a particular company will be around for the long haul.
Without a proven track record, banks may not be confident that the business will generate enough revenue to repay the loan.
Remember, banks and lenders alike are nothing more than risk managers. They assess the risk of loaning you money or giving your company a line of credit, they evaluate the risk of seeing returns on those loans or lines, and they assess the risk of your business closing before they see a return on their investment.
Read more: Small Business Loan vs. Line of Credit: A Guide
In many cases, this acts as a self-fulfilling prophecy for new companies.
You don’t have any business credit, so lenders won’t give you money. Lenders won’t give you money, so you can’t use those loans to prove that you’re a trustworthy business, and on and on.
This is why it’s so easy to fall into the trap of using personal credit to bolster your business’s credit.
Limited assets
Another factor that may contribute to banks’ hesitation is the limited assets of the business.
If the business does not have significant assets to secure the loan, the bank may require a personal guarantor to ensure they have some form of collateral in case the loan is not repaid.
When your business does own different assets, you can use them as collateral to ensure that you receive more favorable loan terms and better credit limits.
Without these assets, lenders, if willing at all, will likely offer lower credit limits and higher fees to ensure they see a return on their loan to your company.
Industry risk
The bank may also consider the risk associated with the industry the business’s industry.
If the industry is highly competitive or volatile, the bank may view the business as a higher risk and may require a personal guarantee to mitigate that risk.
Industries like construction, retail, startups, and restaurants are inherently risky due to several factors that make banks and lenders anxious.
These factors, like fluctuating demand, changing market trends, high failure rates, and intense competition, may cause lenders to think twice about extending a line of credit to your business.
Regulatory requirements
Banks are also subject to regulatory requirements, which may influence their decision to require a personal guarantor.
For example, if the bank is required to maintain a certain level of capital adequacy, they may require a personal guarantee to ensure that the loan will be repaid and that they will not have to write it off as a loss.
Some regulatory environments impose lending criteria on banks, forcing them to follow strict guidelines when evaluating loan applications. If your business has no credit history, it’ll be harder to make it through this initial evaluation.
In addition, anti-money laundering regulations and consumer protection laws exist to hold banks to a higher ethical standard.
Still, if your business doesn’t have a history of compliance and lacks business credit history, you’ll have a hard time obtaining credit from these hyper-regulated financial institutions.
Why you shouldn’t take personal liability
Building business credit with EIN exclusively is difficult, and often lenders and banks will ask for personal guarantees, but you should avoid taking personal liability for anything your business does.
Separation is key to a healthy work-life balance and provides an easy way for your company to keep its finances separate from personal finances. When you muddy the waters by using personal liability to help your business, it becomes difficult to separate the two.
Here are some additional reasons you should build business credit with your tax ID only:
- Risk of personal financial loss
- Limited liability protection
- Negative impact on credit score
- Loss of business control
- Difficulty obtaining future financing
Risk of personal financial loss
When you take personal liability for your business loans, you’re putting personal assets at risk.
If your business is unable to repay the loan, you may find yourself personally responsible for repaying the debt, which could result in significant financial loss.
If things don’t go the right way for your business and you find yourself filing for bankruptcy, a personal guarantee might put your finances on the line for repaying any outstanding debts.
If you’re losing your business, do you want to lose your home too?
A good way to start this separation early is by creating a business bank account for your LLC as soon as possible and using this account strictly for operational purposes.
Read more: Opening a Bank Account for an LLC? Here’s What You Need to Know
Limited liability protection
One of the main reasons to form a business entity such as a limited liability company (LLC) or corporation is to protect personal assets from business liabilities.
By taking personal liability for your business loans, you’re effectively forfeiting this protection and exposing personal assets to potential legal claims and financial obligations.
LLCs are designed to allow Americans a fighting chance of creating businesses they can be proud of. Why sacrifice the protection you receive through your LLC when there are other, better ways to build business credit with your EIN?
Negative impact on credit score
If you take personal liability for a business loan and are unable to repay the debt, it could harm your personal credit score.
This could make it more difficult to obtain personal loans and credit in the future, as well as increase your interest rates and decrease your credit limit.
Again, keeping your business and personal finances separate would be best. There’s nothing worse than going through an economic downturn with your business and suffering from these downturns in your personal life too.
Loss of business control
By taking personal liability for your business loans, you may also give up some control over your business.
Lenders may require certain restrictions and covenants in the loan agreement, limiting your ability to make decisions and manage your business as you see fit.
Some conditions or demands that lenders may attach to your loan terms are changes in management, control, or ownership as a way to mitigate their previously assessed risk should things go south.
Difficulty obtaining future financing
If you take personal liability for a business loan and default on the debt, it may be more difficult to obtain financing in the future.
Lenders may view you as a higher-risk borrower, which could result in higher interest rates and more restrictive loan terms.
This could make it more difficult for your business to grow and succeed over time.
If this seems like a lot and you’re still asking, “How to get business credit with EIN only?” – then don’t worry; we’ll explain that below.
How to build business credit with just an EIN
Thankfully, despite the countless forces working against new businesses and trying to force unsuspecting entrepreneurs into personal guarantees, there are several ways to build your business credit using only your EIN.
Let’s take a look:
- Apply for a business credit card
- Establish trade lines with vendors
- Pay bills on time
- Monitor your credit report
- Get a Virtual Office
Apply for a business credit card
One of the easiest ways to start building business credit with your EIN is to apply for a business credit card.
Make sure you choose a card that reports to the credit bureaus and use it responsibly to begin building a positive credit history.
A specific business credit card allows you to begin establishing a credit history for your company. So many of the previously mentioned restrictions result from a lack of credit history, so using a business credit card that’s separate from your finances is a great first step.
Remember, you should look for attractive terms on this card, regardless of the credit limit. Rather than trying to get the highest limit possible, first focus on solid interest rates, low fees, and decent rewards programs to get the most out of your first business credit card.
Then, you can use your established credit history to secure additional lines of credit or loans in the future when necessary.
Establish trade lines with vendors
Another way to build business credit is to establish trade lines with vendors.
This means that you work with vendors who are willing to extend credit to your business and report your payment history to the credit bureaus.
When you do this, you’re diversifying your credit profile. The more trade lines you have with multiple vendors, the more it shows that your company can manage various credit relationships with several suppliers.
Pay bills on time
One of the most important factors in building business credit is to pay your bills on time.
Late payments can harm your credit score and make it more difficult to obtain financing in the future.
In addition, using applications like CreditSuite, eCredable, and Nav can help you turn your on-time bill payments into credit-building tools without extra effort on your part.
Monitor your credit report
To effectively build business credit with EIN, it is important to monitor your business credit report regularly to ensure that all information is accurate and up to date.
If you notice any errors or discrepancies, make sure to dispute them with the credit bureaus to protect your business credit score.
Get a Virtual Office
Getting a Virtual Office can help build business credit by establishing a physical address for your business. This can help you appear more credible to lenders and may also help you obtain financing with better terms.
Read more: Why You Need a Commercial Address to Build Business Credit
With a Virtual Office, you can secure a prestigious and professional address to help you appear more legitimate to lenders, investors, clients, and customers.
Build business credit with one of Alliance’s Virtual Offices
Building business credit with your EIN is difficult, but not impossible.
A Virtual Office can help you get your foot in the door with banks and start building business credit without taking on personal liability.
Securing a Virtual Office from Alliance to use as your business’s address can help you build business credit with EIN in several ways.
- Documentation
- Because Alliance’s Virtual Offices provide services like mail handling and access to Live Receptionists, meeting rooms, coworking spaces, and mail forwarding, you can establish a solid physical presence complete with a paper trail of various pieces of business documentation.
- These invoices, utility bills, and contracts serve as evidence that your company exists and provide history for potential lenders and creditors.
- Separation of personal and business address
- Possibly the most important aspect of building a business credit with EIN is keeping your personal and business lives separate.
- A Virtual Office helps cultivate this separation. A distinct business address demonstrates that your company is a separate legal entity and isn’t as unprofessional as simply using a PO box or your home address.
- Business listing and verification
- Using a Virtual Office for LLC verification and other business listings helps provide further context and history for potential lenders. It adds additional credibility and can positively affect your business’s credit profile.
- Using a Virtual Office for LLC verification and other business listings helps provide further context and history for potential lenders. It adds additional credibility and can positively affect your business’s credit profile.
- Networking opportunities
- Alliance Virtual Offices come with easily reservable access to meeting rooms and coworking spaces that are used exclusively by other motivated entrepreneurs and business owners.
- Using these spaces to build a strong professional network can open doors to new opportunities.
As you can see, a Virtual Office is a tool that can help your company build healthy business credit with EIN exclusively.
Further reading
- How to Build Business Credit: Building Credit for Your Small Business
- Opening a Bank Account for an LLC? Here’s What You Need to Know
- Why You Need a Commercial Address to Build Business Credit
- Small Business Loan vs. Line of Credit: A Guide
Alliance’s Virtual Offices offer established entrepreneurs and new business owners alike a healthy way to keep personal and business finances separate while simultaneously bolstering business credit.
With a Virtual Office, you can focus on building business credit with EIN alone and ensuring that your personal liability and finances are kept safe.
Contact us to see how Alliance can help you start building business credit with EIN today!
