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When you’re just starting a business, business credit and credit cards are not usually on your radar. This is not surprising, considering most people don’t realize that a company can have its own standalone credit profile and score.
But a business structure, like a corporation or LLC, is an actual legal entity with the same legal standing as an individual. As a result, businesses can have their own credit profiles and scores and have credit cards issued in their own names.
To clear up some confusion, we’re first going to talk about the difference between a genuine small business credit card and the “other” business credit cards lenders’ issue (that are in reality based on your creditworthiness.)
Many lenders offer it for creditworthy business owners with a strong credit profile. These cards are designed specifically for the needs of small business owners and offer them better terms than an “individual”, such as:
But in reality, even though the business name appears on the card, they are still based on (and tied to) the owner’s individual credit score and profile. In other words, they are just the owner’s credit card masked with the business’s name. The owner is still giving a personal guarantee to the card issuer, so should anything go wrong, it is the owner’s legal responsibility to take care of the problem. And in that instance, it is their credit score and profile that will take the hit.
A true small business credit card is solely in the business’s name and not tied to an individual credit profile. These credit cards provide small businesses with a credit limit based on their company’s Paydex score instead of the FICO score used to determine creditworthiness for individuals.
Dun & Bradstreet’s Paydex is a business credit score that measures the likelihood of making timely payments to vendors and suppliers. The scale ranges from 0-100, with higher values indicating an increased propensity for paying on time or sooner than the terms agreed upon. This differentiates Paydex from the standard individual FICO score, which has a top end of 850.
A Paydex score of 80 or more places your company in the best risk category, indicating that your business’s payment history shows a low chance of late payments. Along with Equifax and Experian, Dun & Bradstreet is one of the major commercial credit reporting bureaus.
As mentioned above, the primary factor in determining standalone business creditworthiness is the Paydex score. This means your company must be Dun & Bradstreet registered and have a current D-U-N-S number.
If your business has multiple locations, each of your company’s locations may be granted a D-U-N-S number; however, your credit score should be allocated to your main office’s number. You should utilize the principal D-U-N-S number with suppliers who might be reporting business transactions for credit rating reasons, even if your organization has different offices that deal with suppliers individually. Because the credit rating is used to assess an entity’s economic ability to pay, the data must be appropriately attributed to the entire company.
It’s worth noting that many businesses have reported that the signup process with Dun & Bradstreet is confusing and unwieldy at best. This has led to the rise of companies that help small businesses navigate the D&B signup process, in addition to the business credit building process entirely. Because the business credit building process is so intricate and time-consuming, it’s a wise idea to use the services of a company that can walk you through it from start to finish.
As we’ve established, a “true” small business credit card is one tied to your company’s EIN (Employer Identification Number) based on your business’s Paydex score through Dun and Bradstreet. So if any aspect of the application requires your SSN or personal guarantee, you’re dealing with one the the “faux” business credit cards we discussed earlier.
There are multiple avenues to getting a small business credit card. Here are a few of the most popular:
A great starter method is to apply for a corporate gas card, which does not require a personal guarantee from the owner. For example, if your company generates $1 million in annual revenue and has been in operation for at least one year, you can apply for the Shell Small Business Card with your EIN.
Another good starter option is the prepaid business card. Prepaid business cards are exactly what they sound like: a prepaid balance is deposited into the account ahead of time up to that amount. For card issuers, prepaid business credit cards are usually low-risk, and they don’t require the owner’s guarantee or a Social Security number. Prepaid cards are also an excellent method to keep track of your spending while staying out of debt from credit cards.
Prepaid cards have the disadvantage of not being able to be used to establish business credit. Nevertheless, they’re a good option if you have a bad credit score and don’t want to attach your own credit to your company—or if you’re scared that if your firm fails, your credit score will suffer even more.
It would help if you also considered getting a corporate business card from a store you shop at frequently, like Office Depot or Staples. Some corporate credit cards don’t require personal liability, which makes them ideal EIN credit cards. In addition, corporate store credit cards can include incentives such as purchase discounts, cashback choices, and points and awards.
The “true” small business credit card, these types of cards enable you to assume credit-based obligation through your company. You should be able to obtain a corporate credit card without providing a personal guarantee, which means that your company is responsible for the entire credit card debt. In addition, corporate credit cards generally don’t require a Social Security number, so you should be able to receive company credit with just an EIN based on your Paydex score.
If you wish to apply for a business card with an EIN, corporate credit cards are a great alternative. Corporate cards, on the other hand, have more stringent application requirements. For example, only certain types of business structures are generally eligible, and your company may need to have a minimum demonstrable profit margin each year. In addition, many lenders may grant company credit with simply an EIN but restrict applications to US-based C-corporations, S-corporations, LLCs, and LLPs.
This means you may have a more challenging road ahead of you as a solo entrepreneur to get your company’s ideal small business credit card. This is another area where the services of a company specializing in business credit building may prove invaluable.
If you’re a small business owner, business credit cards can be an easy and convenient way to manage your finances. You can keep track of credit balances, charges, and payments online or even by phone, and most card issuers make it simple to export your data to your bookkeeper or CPA.
Additionally, it can help you manage cash flow by providing a credit line to fund your business at any time of the year when it is needed most. This is critical for companies with seasonal incomes that require credit year-round to prepare for slow periods. This means you won’t have to find or wait for funding from banks or private investors to pay seasonal expenses or purchase inventory that will be sold later on during peak seasons.
A credit card also helps small businesses avoid incurring late fees and penalties from creditors and vendors. Even if you don’t have enough money in the bank when payment is required, as long as there is sufficient credit on your business card, purchases will go through without problems.
Getting a credit card is also vital for establishing a business credit history. It creates what is called “positive tradelines,” which are accounts that must be paid off regularly, generally to vendors. This will improve your Paydex credit score over time because it shows lenders that your company responsibly manages credit.
The best way to start building business credit is by utilizing our Business Credit Building Service. We can help you establish your Dun & Bradstreet and Paydex accounts, start building positive business tradelines and help you get approved for business credit cards.
Filling out our application (click here) and making a simple phone call is all it takes to get started with this program. We’ll then ask you for some basic information to establish and enhance your business credit right away. Visit our page https://americansba.com/business-credit-cards/ to get started building true business credit today.