Saturday, February 16, 2008

EIN, Federal Tax ID & Business Loans


EIN, Federal Tax ID and Business Credit
One of the primary goals of building business credit is to separate your business credit from your personal credit. If you are operating your business as a sole proprietor, these cannot be separated because all your business paperwork is filed using your social security number. In this case, you are personally liable for risks incurred by your business and you also risk your personal assets against business loans. For you to obtain a business loan based entirely on your business, it must have a formal corporate structure, such as a corporation or limited liability company. All your business information is filed under your Employee Identification Number (EIN), otherwise known as your Federal Tax.

EIN and Applying for Business Loans
It is of the utmost importance that you understand how an EIN is used when applying for a business loan. Of itself, your EIN cannot be used to apply for a loan. An EIN can only be used for business identification purposes and filing Federal taxes. It does not substitute for a social security number on a loan application. The identification number that your business needs to have in order to begin the process of building business credit and obtaining financing is the DUNS Number, through registration with Dun & Bradstreet. This is the only way you will be eligible for any type of business credit without a personal guarantee.

Business Credit and Personal Credit
The Dun & Bradstreet Paydex score is the most important score for your business when it comes to any type of application for business credit or business financing. Dun & Bradstreet will assign a Paydex score to your business that ranges from 1 – 100. A good Paydex score is considered to be 80 and above. There are specific steps that can be taken to improve your business Paydex score. Although your personal credit history is separate from your business credit, once you have registered a corporate structure with the state, have obtained an EIN and a DUNS number, it is beneficial in the long run for you to repair your personal credit while you are building your business credit. Every so often, a lender will insist on a personal guarantee, regardless of your business credit, especially for vehicle and equipment leasing and sometimes for lines of credit.

4 comments:

Ida said...

The SBA and D&B recently teamed up to provide small businesses "Smart Steps" to establishing good business credit: https://eupdate.dnb.com/default.asp?partnerid=SBA

Mishi said...

Business loans are a staple nowadays for small businesses. Success doesn't come easily especially to those who are venturing out for the first time so loans come as a necessity to keep things going. Thanks for the info!

Lynn Clark said...

Nice post. This will be very helpful since I want to run a business soon. I know it'll be a challenging at times, so I can use all the financial (and non-financial) advice I can get. Lately I've been thinking about buying a business instead of starting one from scratch. I believe I have enough capital saved, but I'm sure I'll have to take out a loan. Any suggestions? Advice? Thanks.

Ilya at StrongBusinessCredit.com said...

Lynn,

As the main writer of this blog I find it interesting that this particular article is getting the most views. I think its because most people don't know what they have to do with their EIN and Tax-ID.

My advice is NOT to purchase a business, due to all the liabilities that are attached. Please review some of my other writing about strong business credit - http://www.ehow.com/how_4498483_properly-use-shelfcorps.html