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A common suggestion is to obtain a Limited Liability Company (LLC) formation, as it’s easier to get business credit than remaining a sole proprietor. While it’s possible to get business loans and business credit cards with any entity structure, there are several reasons why it’s better to apply as an LLC.
Can You Get Business Credit As An LLC?
The definitive answer is yes. In fact, most lenders prefer that business owners have an LLC or corporation entity to a sole proprietorship as it’s easier to distinguish between business and personal assets on the application. Additionally, an LLC legally separates business and personal finances, which can be beneficial in court-related matters.
To clarify, being an LLC isn’t an automatic guarantee for business credit approval. Credit issuers look at several factors, including your credit history, financial reserves, and recent revenues.
You can apply for business credit as soon as you become an LLC and earn consistent revenue. However, lenders may prefer at least six months to one year of LLC formation history before lending high loan limits or credit limits.
Whether you need a business term loan, business line of credit, or one of the business credit cards for earning travel rewards, an LLC designation provides peace of mind to the bank.
Higher Market Credibility
One of the best reasons to consider applying for credit once you become an LLC is that it’s easier to gain market credibility. For example, you can build a business credit score through Dun & Bradstreet, Equifax, and Experian.
Business credit scores help measure you against similar businesses within your industry. Further, business-specific metrics can provide more details that lenders are looking for that are more challenging to attain when relying on personal credit.
Additionally, it can take more effort and expense to get an LLC formation than remaining a sole proprietor, as you need a registered agent, additional documentation, and annual fees to retain your certification.
Get an Employer Identification Number
A necessary step to obtaining LLC certification is getting an employer identification number (EIN). The IRS issues this number, and it helps credit issuers research your business history.
For example, you can use your EIN to get a credit card. You will also include this number when applying for a business checking account or a business credit card when it’s time to fill out your business profile details.
As a heads up, you may need to evaluate your business credit prospects if you’re changing EIN numbers due to shuffling up the ownership stakes, as the example below highlights:
“Also, as a side note, when a business is sold, even to an existing partner, when the ownership percentage, or structure is changed the IRS generally requires a new EIN to be associated with the business. This would also apply when changing the business name.
Unless the credit files can be merged (which can be a major headache to achieve) in regards to the old EIN and the new one, any credit built under the old EIN will cease to continue building history. I went through this very thing when I bought out a former partner. Nothing changed in the name, or location. At that point I then owned 100% of the business they still required me to get a new EIN,” says Joe Rockhead a senior contributor with MyFICO Forums.
Some Lenders Exclude Sole Proprietors
Certain bank lenders and credit card issuers won’t accept business credit applications from sole proprietors. One example is the Brex credit card lineup.
As a result, the good news is that these lenders may not require a personal guarantee, and the credit inquiries may not appear on your personal credit report.
Business credit card and loan issuers usually include a required documentation checklist for the various entities they accept applications from. This checklist is usually available before reaching the application screen to save you the time of filling out all of the necessary details, only to find out that you’re missing critical paperwork.
Open a Business Checking Account
Another excellent first step for any business owner is to open a business checking account. Consider opening one as soon as you earn consistent income part-time or full-time.
Similar to being an LLC entity, a standalone business checking account helps verify that you’re a legit business and serious about using your credit to grow your brand instead of for personal expenses.
Can You Get Business Credit Card as a Sole Proprietor?
If you’re still a sole proprietor and hesitant about going through the LLC formation process right now, it’s possible to get business credit approval. However, you may not qualify for as high of amounts, and some lenders may resist accepting your application.
Most of the major issuers, such as Capital One or Chase, accept applications from sole proprietors. Additionally, you may even be able to note that you don’t have an EIN yet and are solely applying by submitting your Social Security Number (SSN) or individual taxpayer identification number (ITIN).
Business Credit Cards for Sole Proprietors
Sole proprietors from any legal industry who earn business revenue can apply for business credit cards through most card issuers.
These three issuers have the most versatile options:
- American Express: Earn Membership Rewards® points that are ideal for travel. Other products earn cash back or offer low-interest financing. Co-brand relationships include Delta SkyMiles, Hilton Honors, and Marriott Bonvoy.
- Capital One: The Spark Miles credit cards earn travel rewards, and the Spark Cash earns cash back.
- Chase: This bank’s flagship Ink Business products offer travel rewards and cash back. Co-brand partnerships include United Airlines, Southwest Airlines, and World of Hyatt.
Business Checking Accounts for Sole Proprietors
Opening a business checking account can also provide credibility, especially if you have an EIN. For example, Chase Bank business checking accounts usually offer signup bonuses and several ways to waive the monthly fee.
These accounts can also make it easier to receive payments and pay vendors. Your business banking relationship may also help you qualify for future business credit requests. Additionally, lenders may require a linked business checking account to fund your approved loan.
In conclusion, getting a business credit as an LLC does make it easier, but it’s not necessary in most situations. However, taking this extra step legally separates your personal and business assets, which can provide peace of mind to you and the lender if you encounter financial or legal troubles. Further, you can build business credit more easily, which helps you qualify for more robust financial lifelines.