However, to effectively and successfully manage your restaurant’s financials, you’ll need credit. Without it, you’ll have to use whatever cash you have on hand to pay expenses as they come up—even before you’ve had a chance to earn any money selling your coffees, scones, and croissants. Worse off is that your cash might not be enough to support your growth especially when the business is successful. Growing businesses need time to produce positive cash flows. With credit, your vendors and service providers will trust that you can pay, which means you’ll be able to run your business. Below, we’ll discuss why business credit is so important, how a good credit rating can boost your business, and the simple steps to help fund and expand your operations.
What Is Business Credit?
Credit is the power to purchase goods and services without the cash on hand to pay for them. Credit is extended when the creditor trusts the buyer will pay the full amount agreed upon on time. Business credit can, for example, make it possible for you to open a restaurant, which would likely be much more challenging if you were relying entirely on money out of pocket. There are several forms of business credit, including:
Small business loans Business credit cards Vendor credit (credit that vendors and suppliers extend to trusted customers)
How Business Credit Works
Let’s say you own a hat business and you need raw materials and other goods to make the products you sell. You can’t make money on the hats you’re going to sell until you’ve designed and manufactured them. However, you won’t have money to pay for the design and production of hats until you’ve sold them. If you have business credit, though, you can pay later for the hats you manufacture today; without it, it can be difficult to move forward at all. Once your hat business starts to succeed, your credit can help open the door to success. Your reputation with vendors can help you buy more supplies, your business bank account can give you access to a line of credit, and your good credit can give you greater access to loans.
What Impacts Business Credit?
In most cases, your personal credit can impact your ability to build business credit because banks and credit card issuers will look at both your business and personal credit histories. However, if you have paid off loans for your own car, house, and education (or continue to pay them off on time), you have a headstart as you begin building business credit. Assuming your personal credit is in pretty good shape, to build business credit, you’ll need to follow a few key steps:
Register Your Business
Until your business exists as its own entity, you can’t establish business credit. This is easy to do, even if you are a sole proprietorship. Start by setting up a name, address, phone number, and email domain for your business. Register your business with the IRS to obtain an employer identification number (EIN) as well as with credit reporting bureau Dun & Bradstreet.
Registering for an EIN Number
An EIN is a nine-digit set of unique numbers assigned to your company and used by the IRS to identify your business for tax-related purposes. With an EIN, you officially separate yourself from your business because you, as an individual, are identified through your Social Security number (SSN). It’s fairly easy to get an EIN number; simply go to the IRS website, choose the type of corporation you own, and fill in the paperwork.
Registering for a Dun & Bradstreet Number
Dun & Bradstreet is a credit reporting bureau that provides information to lenders and other businesses. To do this, the firm uses a data universal numbering system (DUNS) number, a unique nine-digit identifier it provides to businesses. Much like an EIN number, the DUNS number is a way to identify your business as an entity separate from you as an individual. More importantly, it’s the number used by lenders and potential business partners to determine whether your business is reliable and financially stable. The U.S. government also requires businesses to have a DUNS number to apply for grants or do business directly with government agencies. You can request a DUNS number online and the process is free.
Open Business Accounts
Once you’re all set with your address and EIN and/or DUNS number, you’re ready to start opening business bank accounts. Whether you choose credit cards, bank accounts, or both, you will immediately start building your credit.
Bank Accounts
Business bank accounts offer a number of perks that personal accounts don’t. For example, they give you purchasing power, allow debit and credit card transactions, and may come with a line of credit and offer personal liability protection. But it’s important to note that banks don’t offer business accounts to just anyone. You have to apply for an account (usually online) and may have to provide:
Your EIN number (or SSN for a sole proprietorship)Business formation documentsBusiness license if neededAny ownership agreements you have
Credit Cards
It is possible to apply for a business credit card using only your business EIN number. In theory, this helps to separate your business from your personal credit, and there are a few companies that offer EIN-only credit cards. The reality, however, is that most credit card companies will ask for your SSN—and will check your personal credit before issuing a card.
Pay Your Vendors
Most businesses depend on vendors and suppliers, and you’ll want to establish positive relationships as soon as possible. That means paying your vendors on time, every time. Depending on your business, some of the vendors you’ll be working with include:
Businesses that provide raw materials for your productsBusiness supply vendors who keep paper in your copiers Product suppliers who provide the products you sell in your shopManufacturers who actually make the products you design
Once you’ve established a positive relationship, you can start to think about establishing credit with your vendors. The better your relationship with your vendors, the better their reviews will be—and the stronger your credit will be.
Track Your Business Budget and Credit
As your business gets underway, you’ll need to manage and track both your spending and your revenue. In addition, you’ll need to monitor and manage your credit rating. Both will be important for keeping your credit high and avoiding potential issues. To manage your business budget, you’ll need to separate your business and personal finances. This is relatively simple if you’ve already created business bank accounts and applied for business credit cards. To manage your credit, you’ll need to purchase credit reports from firms such as Dun & Bradstreet and Experian. While these reports are not free, they are extremely useful because they provide you with information about:
The accuracy of your credit reportsAny changes to your report that could impact your businessAny opportunities to improve your creditPossible identity theftPeople and organizations that are inquiring about your credit
How Business Structure Impacts Credit
If your small business is an LLC, an S corporation, or a C corporation, it’s relatively easy to separate business from personal credit. However, as mentioned, banks and credit reporting agencies are very likely to ask for your SSN to double check your personal credit before issuing business credit. If you are a sole proprietor who does not have employees or particular types of assets, you do have the option of using your SSN as your credit identifier in every situation. If you do, your personal credit will be the only way an agency can determine whether you are creditworthy. Even if you are a sole proprietor, you should establish a bank account in your business’s name to separate your finances.
