Launching Your Own Business? Here’s What to Know about Credit

Starting a small business involves a lot of spending: Supplies, office space, and hiring employees will cost a lot—even before your company begins to bring in money. That’s why many small business owners need to take out a loan or line of credit to fund part or all of their start up costs, which is what makes building good credit so essential.

While it seems easiest to just charge company-related purchases to your personal credit card, setting up a separate business line of credit is important. For one thing, if you were funding your business with your personal credit line and it doesn’t succeed, you can risk losing your personal assets.1

Getting Started

Before you officially create a business, there are a few steps you need to take. First, talk to your CPA or tax professional about incorporating your business or forming a Limited Liability Corporation (LLC). You may also need to apply for a federal Employer Identification Number. Opening business bank accounts will keep your personal expenses separate from your business expenses.

Having a CPA on your team is key to knowing about the tax benefits of owning a business and tracking your business expenses.

Your Credit Score Affects Your Business

A key factor in qualifying for a business line of credit or business loan: a high FICO® score. Once your business has been established, talk to your local bank or credit union regarding adding a line of credit to your business. If you’re the business owner, the bank will run your credit to help determine if you qualify, and your credit score—combined with your income—can be influential in whether or not you qualify for a loan.

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How a Business Credit Card is Different

Ready to shop around for a business credit card? They’re a bit different than personal credit cards. Some of the differences are good, like higher credit limits, rewards you can use to spend on company expenses like travel, or special features that let you itemize expenses to make accounting easier.2

But the other differences, while not necessarily negative, are things you need to pay attention to: Your interest rate can get higher without notice, and there’s no limit on late or over-limit fees.3 This is because the legal protections that exist for personal credit cards don’t apply to business ones (though some business cards apply those legal protections voluntarily).4 When looking for a business card, it’s really important to read the fine print and understand the payment schedule and penalties.

Now that you have a business credit card, make sure you’re paying it off in full and on time every month with your business checking account. This will help to keep your credit score high and your credit utilization ratio low, and will allow you to apply for more credit at a low interest rate in the future as your revenue grows.

Ultimately, a business credit card is an important tool in getting a new company off the ground. A larger line of credit will help you fund the set-up while you’re growing your business. When starting your own business, shop around carefully for a business credit card that best meets your needs.

1. https://www.sba.gov/blogs/how-build-business-credit-your-start

2. http://www.creditcards.com/credit-card-news/help/7-things-know-business-credit-cards-6000.php

3. http://www.creditcards.com/credit-card-news/business-credit-cards-10-differences-1269.php

4. http://www.consumerfinance.gov/credit-cards/credit-card-act/feb2011-factsheet/

Legal Disclaimer: This site is for educational purposes and is not a substitute for professional advice. The material on this site is not intended to provide legal, investment, or financial advice and does not indicate the availability of any Discover product or service. It does not guarantee that Discover offers or endorses a product or service. For specific advice about your unique circumstances, you may wish to consult a qualified professional.

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