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How to build business credit as a sole proprietorship?

With a good score, you can obtain business loans as a sole proprietor, but the process is lengthy

by Luis O., CFA, FRM
7 December, 2022
in Credit Card
How to build business credit as a sole proprietorship?

When you want to start a business, there are many things to consider, such as paperwork, purchase of materials or premises, and rent. You should also ask yourself if you can have the business as a sole proprietor or if you have to look for partners to cover the expenses.

As the sole proprietor, you can look for ways to build business credit as a sole proprietorship to cover all the business’s costs. Considering several tips can make obtaining credit scores more efficient and faster.

Contents

  • What are the chances of getting business credit as a sole proprietor?
  • How can I increase the probability of getting credit?
    • Look up your personal credit information
    • Have all the necessary application information on hand
    • Choose something as a personal guarantee
  • How can I earn business credit as a sole proprietor?
    • Convert your business into a corporate entity such as an S or C Corporation or an LLC
    • Keep your credit reports up to date
    • Get a Federal Tax Identification Number
    • Open a business bank account
    • Request net terms with suppliers and vendors
  • What are the benefits of getting a business credit card?

What are the chances of getting business credit as a sole proprietor?

It is possible to obtain business credit, but this does not mean the process is easy. Currently, the chances of getting a loan as a sole proprietor are very low, as banks and lenders consider these businesses very risky.

They see it as a risky loan because you don’t have an additional person who can tend to the payments in case of accidents, illness, or bankruptcy. In addition, the risk of failure of small businesses is very high.

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Because of this, studies have concluded that approximately only 25% of sole proprietorships that requested to borrow money were approved.

How can I increase the probability of getting credit?

There will always be a percentage chance that you will not be approved for credit. However, there are ways to reduce this risk.

Lenders first review your credit history, so you must demonstrate that you have a solid business through your credit history.

Also, remember that the credit limit and interest rate will depend primarily on your credit. There are several ways to improve your credit history, which are explained below.

Look up your personal credit information

The most important information requested by banks and lenders is your credit scores, so before starting the process, ensure that your score is within the approval range.

Being close to 700 is considered a good credit score, but some companies are less demanding and approve credits from people with scores of 660 to 670.

Choose the financial institution with which you are most likely to be approved for credit.

It is best to apply for credit from an institution with which you already have a personal account, so it is recommended to investigate whether they offer the option of obtaining a commercial credit card.

In this way, they will already be aware of your history, and the chances of your approval will be higher.

Have all the necessary application information on hand

Most lenders have the same requirements. These include your social security number, your company’s monthly income and expense history, and your tax identification number. You must have an EIN to acquire the IRS if you already have employees.

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You will also need to show how long the business has been in operation for as this is something that banks usually check, as well as whether it is viable for approval.

Choose something as a personal guarantee

As stated earlier, these loans are very risky for banks, so one way to increase the likelihood of being approved is to decrease the percentage of risk to them by offering a personal guarantee.

Many pledge business machinery, homes, real estate, or monetary down payment guarantees as collateral.

How can I earn business credit as a sole proprietor?

Here are some tips for earning business credit as a sole proprietor. Read carefully!

Convert your business into a corporate entity such as an S or C Corporation or an LLC

This way, you can generate your business credit history by integrating yourself into a corporate identity. Through them, you can acquire a social security number for your business, which will help you register for business credit and submit applications to lenders.

On the other hand, corporate entities provide a higher credit score than personal credit.

Keep your credit reports up to date

Financial institutions are responsible for monitoring everything related to your company’s credit files through different sources. Because of this, they may get different information.

If you don’t have the correct information, this could cause damage to your score. However, you can update basic information quickly.

Get a Federal Tax Identification Number

This is free and is used to help you file taxes, apply for licenses, and apply for permits and business credits. 

Open a business bank account

This allows you to separate personal and business payments. Through it, lenders extract key data they cannot get from a personal account.

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Request net terms with suppliers and vendors

This is the simplest and most common way to generate trade credit because credit is usually reported to the trade credit bureaus when purchasing inventory on credit. However, remember that not all are responsible for reporting this, so be sure to choose only those that report.

This way, you can create a credit profile for your company and subsequently get a score. Keep in mind, however, that not all companies will be able to provide you with a credit profile for your company.

What are the benefits of getting a business credit card?

Business credit cards will make your life easier in all aspects; mainly, they will help you to generate credit scores. Through it, you have to keep up with your payments and keep your balances low or zero.

The application process for business credit cards is not complicated, as you only need a social security number.

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    • Jobs that don’t require college
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      • Behavioral questions and answers for interviews
      • Technical Interview
      • Sample thank you email after interview
      • You were fired on an application
    • Job Application
      • Kohl’s Job Application
      • Baskin Robbins Hiring Age
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      • Target Hiring Age
      • Apply to hobby lobby
    • Job Profiles
      • Physiologist
      • Golf Caddy
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      • Maurices Credit Card Payment
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      • How to Pay my TJ Maxx Credit Card?
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      • How Suddenlink bill can be paid?
      • How to make Furniture Row credit card payment?
      • Bed Bath & Beyond’s Credit Card Payment Process
    • Netspend Atm
    • Trial deposit Amazon Creditbuilder
    • Transfer Money From EDD Card to a Bank Account
    • Credit online shopping
    • Transfer funds with Routing and Account Number
  • Student loans
    • Increase Total Loan Balance
    • Bad Credit Loans Urban BCL
    • Reduce Total Loan Cost
    • Canceling Student Loan Debt
    • Unsubsidized Student Loan
    • Borrow money from a millionaire
    • H&R block Emerald Advance
    • Chevy offer 0 Financing
    • Days Mortgage Approval
    • Mortgage on 1 million
  • Insurance
    • Subscriber Id Insurance Card
    • United American Insurance Provider Portal
    • Unregistered Vehicle with Insurance
    • Home Insurance Claim Adjuster Secret Tactics
    • Agi renters condo insurance
    • Walgreens accepted insurance
    • Dentist that take caresource
    • Redpoint county mutual insurance company
    • Insurance walgreens accepts
    • Cricket wireless insurance claim
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    • Stop paying child support
    • Home depot health check
    • Beat contempt of court for child support
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