The importance of credit in building new businesses, and what you should know before you borrow money. We provide a step-by-step instruction on the various ways you can establish credit.
1) Establish your personal credit.
“For a new business, it’s your personal credit that matters,” said Chris Dlugozima, a certified consumer credit counselor at the nonprofit GreenPath Debt Solutions. According to Dlugozima, credit organizations will look at the proprietor’s track record until the business develops a credit profile of its own, which may take five to six years.
2) Apply for ITIN
If you don’t have a social security number, the first thing to do is to get the Individual Taxpayer Identification Number (ITIN).
Print out the application form from the Internal Revenue Service’s website and follow the instructions closely.The application is usually submitted by mail; another option is to use services of an IRS-authorized Acceptance Agent or visit an IRS Taxpayer Assistance Center. The application requires the following documents: a valid federal income tax return (unless you qualify for an exception); your original, notarized, or certified proof of identity; and foreign status documents. However, ITIN numbers are issued regardless of your immigration status.
You will receive a letter with your ITIN, usually within six weeks, says theIRS w. Once you have the ITIN, you can apply for a secured credit or a credit builder loan.
Financial advisers recommend reaching out to other business owners to learn from their experience.
3) Get the Secured Loan/Credit Card
The purpose of either a secured loan or a secured credit card is to establish credit history. To apply for a secured credit card or a secured loan you can turn to a bank or a credit union. “The annual fee on such a card should not exceed $35,” said Dlugozima. “Credit unions often do not charge an annual fee”.
According to Kristen Euretig, a certified financial planner and financial advisor at Brooklyn Cooperative Federal Credit Union, secured loans and secured credit cards are “credit treadmills.” You put down a deposit – $200 minimum, usually – and receive a card or loan with an equivalent credit line; basically you are lending yourself your own money.
Euretig recommends a secured loan over a credit card: the interest rate on a loan is usually five to eight percent, as opposed to a card with interest rates up to 20 percent, on average. She said, the Brooklyn Cooperative Federal Credit Union offers two types of loans. You can put down $500 upfront, receive $500 immediately and pay it back over six month; or pay $85-dollar a month for the same period of time. The second option is good for those who don’t have enough money saved, said Euretig. “After six months you can have a good credit score.”
If you choose the secured card, Chris Dlugozima of Greenpath Debt Solutions recommends setting up one automatic charge to the card, such as a cell phone or Internet bill. “Make sure the charge is less than one-third of the available credit on the card. Other than that, avoid using the card,” he said. To build a good credit score with a secured card, use as little credit as possible. Putting the card on the automatic charge takes away the human impulse to spend, Dlugozima explained.
Although a secured card or a secured loan presents no risk to the issuer – you secure them with your own money – it’s dangerous to get used to spending on credit, said Euretig, especially when your goal is to establish good credit.
4) Obtain a Regular Credit Card
Once you established a credit history with a secured card or a loan, it’s good to get a regular credit card. Not having a credit card hurts your credit score, said Euretig.
You should make purchases with this card to show how responsibly you borrow. Lenders, insurers or commercial landlords will look to see whether you pay on time and if you have high balances, said Euretig.
If you are not using your card, you are not moving your credit, said Yleana Garrido, a team leader in asset recovery and credit coaching at Accion USA, a micro-lender specializing in Spanish-speaking immigrant entrepreneurs.
5) Learn From Others’ Mistakes
Before you use credit and especially before taking out a long-term debt, it’s important to learn how to manage your credit.
When it comes to long-term debt, you need to project how quickly you can pay it off, how much it will cost, and compare the costs to the benefits that the loan may bring.
“Any time that an individual or business incurs debt, it presents a risk,” said Greenpath’s Chris Dlugozima.
If you are new to this country, it’s important to learn how the lending system works. Financial advisers recommend reaching out to other business owners to learn from their experience.
“I know it’s not easy, but certainly talk to as many professionals and business owners and possibly learn from either their mistakes or what they’d have to share,” said Dlugozima.