EIN loans provide valuable benefits to business owners. To get one, here’s what small business owners need to know.
Every business owner would prefer to borrow capital based upon their business’ credit rather than their own.
Often called an EIN loan, loans based upon business credit, frees the business owner from personal liability. If the business were to default, the owner’s personal credit would not be damaged.
For larger businesses, these types of business loans occur quite frequently. Companies such as a Ford, Apple or General Electric would never need the personal assurance of the CEO or Chairman to secure a business loan based upon the business’ credit.
These types of companies possess billions in assets and equipment. In addition, they’ve got tens of millions of dollars in accounts receivable and a long history of successfully paying back debt.
Smaller businesses may find more difficulty in obtaining EIN-based loans.
Simply put, banks view small businesses lending as a huge risk. Then, the average small business has much less in assets as compared to their larger counterparts. Banks want a high level of confidence that the money they give a business will be repaid.
Factor in that most small businesses fail within 3 years, it becomes clear why the bank doesn’t love lending to small businesses.
Even with all the challenges, securing an EIN only loan can be done by a small business. Getting the loan requires completing a few fundamental steps, and following up with diligent attention to keeping the business’s debt in good standing.
Below we’ve described the process for helping any small business secure an EIN-based loan.
First Things First, Establish the Business as a Separate Entity
If an owner plans to borrow money under the name of the business, the business will need to exist as its own legal entity.
More specifically, to get a loan based upon business credit, the business will need to be legally recognized as an LLC or Corporation.
What if the business exists as a sole proprietorship?
As a sole proprietorship, the owner legally IS the business. Even if operating under a dba designation, legally the owner will be held responsible for any business debts or liabilities. The bank would have very little incentive to use the business EIN, when it will be the sole owner who must guarantee the debt.
With an LLC or Corporation, the business owner no longer has to assume liability for the business. If the business were to be sued, it would be the business—not the owner as the defendent.
In most states, establishing an LLC or Corporation can be accomplished with very little investment. No lawyer or other paid agent will be required.
Obtain Your Employee Identification Number (EIN) from the Internal Revenue Service (IRS)
The IRS uses the EIN to identify each individual business entity for tax purposes. An LLC or Corporation will need an EIN so that the IRS can properly calculate taxes.
A sole proprietorship may forgo obtaining an EIN for tax purposes.
Banks may require an EIN to open a bank account. An EIN may be required from vendors in order to establish credit accounts or tradeline accounts.
Getting an EIN takes only minutes, and the process can be completed online at the IRS website.
Register for a Dun & Bradstreet D-U-N-S® Number
In order to get an EIN-based loan, the business will need to attain a D-U-N-S (DUNS) Number.
What is a DUNS Number?
Think of the DUNS number as a social security number for the business. Remember the business legally became its own entity when the owner established the LLC or Corporation.
So now the business has a unique business identifier, just like an individual SSN. All of the business’ financial transactions can be recorded under the DUNS number. That collection of financial information including payment history, goes into a DUNS Credit File.
The Credit File will act as the business credit report.
For their part, Dun & Bradstreet will do the research and follow up to track payments and company information. They’ll research public financial information about the business including tax filings, judgements or liens.
As a business conducts business and pays debts, Dun & Bradstreet will keep track of all those transactions, and record them in the business’ credit file.
Dun & Bradstreet will also make the credit file available to other businesses. Anyone can request a business credit file if one exists. Businesses will request a copy of a company’s credit file for various reasons, not just for lending.
Open a Bank Account for the Business
Creating a bank account in the business name, further establishes the business as its own legal entity.
When time comes to apply for a loan, the business will be treated as any other loan applicant—individual or otherwise. The bank will use the business bank statements to get a perspective of the cash flow condition of the business.
Again, the bank wants to confirm the business has enough money to repay the loan.
Business bank accounts can be opened with as little as $5 in deposits. Be sure to understand any fees associated with usage. Shop for the best deal, not every bank offers the same fee structure or minimums.
What Happens Next?
Once the basics have been accomplished, the hard part starts—building good credit for the business.
The real work comes with building the business’ credit. But how does a business build credit? A business builds credit the same way individuals do, by paying bills and debts on time.
Instead of a credit score, businesses get assigned a PAYDEX score by Dun & Bradstreet. A personal credit score has a maximum value of 850, whereas PADEX scores range from 0 – 100.
From a financial perspective, a PAYDEX score of 80 represents the threshold of good credit for a business.
As with personal credit, building a PAYDEX score will require time and effort by the business owner.
We’ll provide a more indepth look at PAYDEX scores in an upcoming post.
What If a Business Needs Funding Immediately?
First Union Lending works with a variety of businesses across the U.S. We are invested in seeing our clients grow and succeed. If you need to purchase new software, update your equipment, or implement new systems to make your sales process go smoother, we have the resources to help.
With short-term loans, merchant cash advances, and lines of credit, among other products, we can get you the cash you need right now—not weeks from now. Some clients get the money within two business days. Call 863-825-5626 today to get started!.