It’s not easy to get a business loan, especially if your business is new. However, many entrepreneurs can obtain financing using only their Employer Identification Number (EIN).
What Is an EIN?
An Employer Identification Number (EIN) is a distinct nine-digit identifier assigned by the IRS to distinguish a business entity. Functioning like a Social Security Number (SSN) for individuals, the EIN is crucial for various business functions. It’s necessary for tasks such as setting up a business bank account, handling tax obligations, and applying for loans. Notably, even companies that don’t have employees can apply for an EIN, making it an essential resource for entrepreneurs seeking to formalize their operations and access funding.
Why Is an EIN Important for Business Loans?
An EIN allows business owners to keep their finances separate from business finances. This separation is crucial when applying for loans since lenders focus more on the business’s financial situation rather than the owner’s credit history. Having an EIN shows that your business is a legitimate entity, boosting your credibility and improving your chances of getting funding. This distinction simplifies accounting and enhances your business’s profile with lenders, making it easier to secure financial resources.
How to Get Business Funding with an EIN
Obtaining business loans with an EIN only is possible, though it typically requires additional documentation. Here are the key steps to follow:
1. Obtain Your EIN
Before you seek a business loan, make sure to obtain your EIN. It’s easy to do this via the IRS website. The application is free of charge and designed to be user-friendly, making it easy for entrepreneurs to get their EIN without any hassle.
2. Open a Business Bank Account
After getting an EIN, open a bank account for your business. This account will serve as the foundation for your business’s financial activities. All payments to vendors and business expenses should go through this account. Keeping your finances organized will make it easier for lenders to assess your business’s financial health.
3. Establish Business Credit
Begin developing your business credit profile by applying for a business credit card and using your EIN for all transactions. Ensure that you pay your credit card on time to have a good credit history.
4. Prepare Financial Statements
Collect essential financial documents to support your loan application. The documents you’ll need to prepare include profit and loss statements, balance sheets, and cash flow statements. These documents showcase your capacity to pay promptly.
5. Develop a Comprehensive Business Plan
Ensure that you have a business plan that will thoroughly show your business objectives and strategies to achieve them. A thoughtfully organized plan can demonstrate to lenders that you possess a clear vision for your business, increasing your likelihood of securing loan approval.
Types of Business Loans for EIN Applicants
While obtaining business loans with an EIN alone may seem challenging, several loan options cater to entrepreneurs without extensive credit histories.
Equipment Loans
Equipment loans are often a great option for startups needing to finance equipment purchases. These loans use the equipment as collateral, which reduces the risk for lenders. Because the loan is linked to a physical asset, lenders may be more open to financing businesses that only have an EIN.
Invoice Financing
With invoice financing, you can use unpaid customer invoices as collateral to secure a loan. This option allows you to access cash quickly, as lenders will provide a percentage of the invoice amount upfront. Once your customers pay, you can repay the loan.
Invoice Factoring
Like invoice financing, invoice factoring lets you sell your outstanding invoices to another company for a reduced price. The factoring company assumes the task of collecting payments from your customers and forwards the remaining amount to you after deducting their fees. This method provides fast access to cash without needing an extensive credit history.
Merchant Cash Advances
Merchant cash advances provide quick cash to businesses in exchange for a percentage of sales from credit card transactions. This financing option is convenient as it doesn’t require monthly payments or collateral. However, it’s essential to note that these advances often come with higher fees.
Challenges of Securing Loans with an EIN
While it is possible to get a business loan with just an EIN, there are challenges associated with this approach. Lenders typically assess personal details, credit history, and collateral to reduce their risk when granting loans. Therefore, if you only provide an EIN, you may encounter some limitations.
Limited Loan Options
Many lenders prefer applicants with established credit histories and personal guarantees. As a result, businesses applying solely with an EIN may have access to fewer loan options, which could include higher interest rates and shorter repayment terms.
Higher Interest Rates
Lenders may perceive businesses without a robust credit profile as higher risks. Consequently, they might charge higher interest rates on loans issued to applicants with only an EIN. Understanding this potential trade-off is crucial when considering your financing options.
What to Do if Your Application Is Denied
If your startup business loan application using an EIN is turned down, stay positive. There are many things you can do to increase your chances of getting approved.
Review Your Credit Reports
Start by reviewing your personal and business credit reports for any discrepancies. Mistakes can impact your credit score and affect your eligibility for a loan. Quickly dispute any errors you find so they can be corrected.
Improve Your Financial Health
If your credit reports are correct, focus on reducing any outstanding debt and making sure to pay all future bills on time. Keeping older credit accounts open, even when paid down, can also positively influence your credit profile.
Explore Alternative Funding Options
If conventional loans aren’t feasible, explore other funding options like small business grants or crowdfunding. While competitive, these avenues can provide necessary capital without the strict requirements of traditional lenders.
Building a Bright Future with Your EIN
An EIN serves as more than just an identification number; it’s essential for establishing your business and obtaining financial support. While obtaining business loans with just an EIN is possible, it often requires additional documentation and effort to prove your business’s financial stability.
FAQs
Can you build business credit with just an EIN?
Yes, building business credit with just an EIN is possible, especially when you use it to open a bank account and establish financial transactions.
Can you get a small business loan with bad credit and just an EIN?
While it’s feasible to obtain a loan with bad credit using only an EIN, your options may be limited.
What is the average time it takes to get approved for a small business loan with just an EIN?
The approval time varies, with some loans disbursed quickly and others taking several months, depending on the lender’s process.
Are there any added fees to a small business loan with just an EIN?
While some lenders may have unique fees, applying with just an EIN typically does not incur additional standard fees.