US Credit Requirements for Business Formation in 2021

Forming a business can be costly; it requires enough working capital to be able to afford initial expenses, which could include: inventory, real estate, equipment, payroll, and hiring expenses. This makes it difficult for businesses to be formed from the potential owner’s savings alone, and everything has only become harder with the adverse economic effects of COVID-19. Several requirements must be met for a company to apply for a business loan, most of these revolve around credit but they are not limited to this.

Properly Established Business

The first thing a business must ensure before it can even begin thinking about a commercial loan is that it is properly established. This demonstrates to lenders that the business is credible, which in turn allows the business to build credit. To do so requires that the business is registered as a formal business entity such as a limited liability corporation (LLC) or a corporation.

Once a business structure has been selected the business must get an Employer Identification Number (EIN). These are necessary to file a business tax return as well as open a business bank account and apply for loans from a bank/other financial institutions. A company must be incorporated in the US and meet certain additional requirements in order to be eligible for an EIN. They can be found for free on the IRS website, or sent via fax or mail.

The next step is to open a business bank account; a business checking account is needed to help build credit. Such an account keeps business finances separate from personal funds and makes the LLC appear more financially secure. The bank accounts can be opened online by going to one of the many online banks that offer this service, such as ChaseBank or BlueVine.

Lenders take several factors into consideration when deciding to extend credit, like whether a business has a phone line with 411 directory assistance or a website detailing the corporation’s activities. They demonstrate to a creditor that the business is legitimate and poses less risk to them.

Finally, businesses must obtain a ‘DUNS number’ from Dun & Broadsheet. This nine-digit number identifies a business as unique from every other one around the world. Creditors use it to search for a company’s credit file and investigate its credit history.

Build Business Credit History

Completely new businesses will need to set up Net-30 vendor credit trade lines as they will have no commercial credit history. This is an important first step because these starter vendors will help build credit and establish trade lines with Dun & Broadsheet and other business credit reporting agencies.

Net-30 vendor credits indicate that the borrower has 30 days from the date of the invoice to repay the creditor with the balance in full. The earlier the borrower repays the balance the better; late payments negatively impact credit rating. It’s recommended to set up a minimum of three vendor credits to ensure the business has three different trade lines – this helps their business credit score rise quickly which is useful for acquiring larger credit lines in future

Once these Net-30 vendor tradelines have been established on a business’s credit history, they can pursue applications for business loans. Approval for loans such as these will now be possible due to the Net-30 vendor tradelines that will appear on the business’s credit reports.

Before applying for business loans the company must ensure it has an established track record in its industry; clear evidence of how it is profitable and a solid plan to repay the loan on time with interest.

Closing Remarks

There are strict credit requirements to be able to apply for a business loan to form a company that is in place to illustrate to creditors that the borrower is a legitimate and trustworthy one that they are risking as little as possible. A business must build up its credit history first with Net-30 vendor credits before moving its way up to business and capital loans. However, before it can do any of this it must satisfy several preliminary requirements of establishment that demonstrate credibility on an even more basic level. This may be proper registration, having a business checking account, or owning a phone and DUNS number.