For many entrepreneurs, business credit is suddenly a concern – whether that’s getting offered payment terms from a supplier, or having a bank actually look at a loan application, or finding out that a company credit card is a necessary evil for keeping track of their expenses.
It happens, and then business owners will stumble upon all these weird terms that they don’t know what to make of – EIN, SSN, business credit profile, and CPN. Some of these terms are actually pretty useful, while others can get business owners into serious trouble.
Getting a handle on the difference between them is pretty crucial before you start applying for credit or shelling out cash for a service that promises to give you a fresh start.
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What is a CPN?
Entrepreneurs should understand what a Credit Privacy Number is before considering any service that presents it as an alternative identification number. CPN – that’s short for Credit Privacy Number, Credit Profile Number, or Credit Protection Number – is a nine-digit number that you’ve probably seen marketed as an alternative to your Social Security number.
The Federal Trade Commission has been warning people about companies claiming to create a new credit identity – and what’s scary is that some of them might use stolen Social Security numbers, or encourage customers to go out and get an Employer Identification Number for nefarious purposes. And by the way, the FTC says that if someone tells you to lie on a credit application, that’s a big red flag of a credit repair scam.
Just because a number has nine digits doesn’t make it legitimate, by the way. That number sold to you as a CPN might belong to someone else – and if you use it to apply for credit, you could find yourself with rejected applications, closed accounts, financial losses, and even get in hot water with the law.
Entrepreneurs need to be super careful when they hear someone claim that a CPN can magically make your bad credit go away, or create a completely new personal credit history.
What is an EIN?
An Employer Identification Number, or EIN, is a federal tax ID number issued by the Internal Revenue Service. It’s used to identify businesses, tax-exempt organizations, trusts, estates, and certain other entities.
The good news is that the IRS gives out EINs for free, and you don’t have to pay an application fee.
Businesses can use their EIN for activities like:
- filing their federal business tax returns
- opening a business bank account
- handling employee payroll
- applying for certain permits and licenses
- getting accounts set up with vendors
- and applying for business financing
Whether or not your business needs an EIN really depends on things like its legal structure, tax obligations, and whether or not it has employees.
An EIN is, by the way, a legitimate thing – but its main purpose is to identify a business entity. It doesn’t get rid of your bad personal credit, create a second personal identity, or guarantee that a company will be qualified for financing.
CPN vs EIN: What’s the Main Difference?
The difference between a CPN and an EIN is pretty straightforward.
An EIN is issued by the IRS to identify a business or one of these other qualifying entities. A CPN is not issued by any government agency, and it can’t be used as a legit substitute for a Social Security number on a personal credit application.
It’s also worth noting that having an EIN doesn’t guarantee that a lender will only be looking at the business.
If your company is brand new, it’s probably going to have limited revenue, a short operating history, and no track record of making payments – and in those cases, a lender might ask to see your personal credit, or ask you to sign a personal guarantee as a safety net.
It’s not because the EIN has failed, by the way – it’s just that the lender is trying to get a complete picture of the risk.
As your business builds its own track record and gets more established, it’s the business’s own financial history that will start to play a bigger role in deciding whether or not you’ll get approved for a loan, or what interest rate you’ll have to pay.
Why CPN Offers Appeal to Entrepreneurs
Before paying for a separate credit number, entrepreneurs should learn more about Credit Privacy Numbers and carefully evaluate the legal and financial risks. When you’re starting a business, it’s totally natural to get your personal and business finances all mixed up. Many founders use their own personal savings, personal credit cards, or other consumer credit to keep their startup afloat in the early days.
And because of that, it’s pretty easy to get worried that your bad personal credit is going to hurt your business’s chances of getting approved for a loan down the line. A promise to get hold of a separate number and start fresh might sound like just what you need.
But the truth is, legitimate business separation comes from doing all the right things – like registering your business properly, keeping accurate financial records, setting up a dedicated bank account, and actually following through on your credit applications with the truth.
You don’t get to create a separate credit identity just by substituting some other number for your SSN.
How to Establish Business Credit Legitimately
Building business credit does take some time, but it’s a lot safer and more valuable than trying to create a new identity.
Choose a Business Structure That Works for You
If you’re starting a business, you’re probably going to want to be a corporation or an LLC – these structures can create a pretty clear separation between the business and its owners, although the exact tax effects can depend on how you set things up and where you live.
Sole proprietors can do just fine too – but their personal and business obligations can be a lot more intertwined.
It’s a good idea to talk this over with a qualified attorney, accountant, or tax pro before you decide on a structure.
Register Your Business Properly
Make sure that all the information in your business registration is consistent – whether you’re talking about your tax documents, bank accounts, licenses, or credit applications.
It’s a lot easier to keep track of everything if you’re all squared away in the first place.Differences in company names, addresses, phone numbers or ownership details can make verification a real pain for lenders and vendors.
Obtain Your EIN Directly from the IRS
Eligible businesses can get an EIN from the IRS free of charge.
But owners need to be on the lookout for websites that are trying to impersonate government services or are charging excessive fees for something the IRS does for nothing.
An EIN is only for real business and tax purposes, so use it for that and nothing else.
Open a Separate Business Bank Account
Separating out your business income and expenses makes bookkeeping a whole lot clearer and helps demonstrate that the company is for real.
Plus, it gives lenders, accountants and financial pros cleaner records to rummage through.
Business owners should try to keep their hands off personal expenses in a company account whenever possible – its just good practice.
Work With Vendors That Report Payments to the Credit Bureaus
Some suppliers report business payment activity to credit reporting agencies, while others do not.
Before assuming a vendor account will help establish business credit, ask whether they actually report payment activity and which credit bureau gets that information.
Pay Your Business Bills On Time
Consistent, timely payments help create a genuine financial record.
The Small Business Administration says that building and managing business credit can make it easier to get financing and might even get you better terms.
Entrepreneurs should definitely keep an eye on due dates and communicate with creditors as soon as possible if the business is struggling with cash flow.
Keep an Eye On Your Personal and Business Credit Reports
Credit reporting errors can happen to anyone. Business owners should check through the reports available to them, dispute any inaccurate info through the proper channels and keep documentation backing up payments and account status.
Accurate negative info generally cant just be wiped off because its inconvenient – building stronger credit usually takes responsible financial behaviour over a long time.
Warning Signs You’re Being Sold a Questionable Credit Deal
Entrepreneurs should think twice when a company:
- Promises a whole brand new credit identity
- Claims a CPN can legally replace a SSN (which it cant)
- Guarantees loan or credit card approval (sound too good to be true)
- Tells applicants to enter false information (do not do this)
- Suggests using an EIN as your personal ID
- Demands payment before explaining the service clearly
- Says you can get rid of bad credit immediately (that’s not how it works)
The FTC has been warning consumers about companies that promise to hide bad credit, create a new identity for you or encourage false statements on credit apps.
Good Business Credit Takes Time and Effort to Develop
Entrepreneurs need access to capital to get their business up and running, but the way you get that capital matters.
An EIN and a CPN are not interchangeable – an EIN is a real ID number for your business thats issued by the government, while a CPN is not a government recognised alternative for a SSN and should be used as a legitimate business identifier only.
A better approach is to build your business financial credibility the right way, starting by registering the business properly, getting your EIN when you need it, keeping personal and business finances separate, keeping accurate records, paying your bills on time and being honest with lenders.
That process may take a bit longer than some of the so-called credit shortcuts out there – but its going to produce something way more valuable : a business financial profile that lenders, vendors and potential partners can look at and trust.
