Establishing business credit is crucial for any entrepreneur or small business owner. It can provide access to funding, favorable terms with suppliers, and a solid reputation with lenders.
However, building business credit can be challenging if you have a low personal credit score.
Thankfully, it’s not impossible. Here’s a guide on navigating this process and setting your business up for financial success, even if your personal credit is low.
Understanding the Difference Between Personal and Business Credit
Before diving into strategies, it’s important to understand that personal and business credit are distinct entities. Personal credit reflects your history of managing personal debts, such as credit cards, mortgages, and personal loans.
On the other hand, business credit evaluates your company’s ability to handle its financial obligations. Lenders and suppliers look at business credit to gauge the risk of extending credit to your business. Building a robust business credit profile allows your company to stand on its own financial feet, independent of your personal credit history. This separation is essential for protecting your assets and ensuring your personal financial setbacks do not affect your business’s growth.
Register Your Business and Obtain an EIN
One of the first steps in building business credit is legally separating your business from yourself. You can register your business as a legal entity, such as a Limited Liability Company (LLC) or a corporation. This step is crucial because it distinguishes your business’s financial activity from your personal finances, allowing you to build a business credit profile independently of your personal credit score.
Next, obtain an Employer Identification Number (EIN) from the IRS. An EIN functions like a Social Security number for your business. Opening a business bank account, filing taxes, and applying for business credit is necessary. This unique identifier helps establish your business’s credit identity with credit bureaus.
Open a Business Bank Account
Once your business is registered and you have an EIN, the next step is to open a business bank account. A dedicated business bank account is crucial for separating your personal and business finances and helps establish your company’s financial presence.
Lenders and credit bureaus will look for a history of transactions that indicate a financially healthy business. Ensure all your business transactions go through this account, including vendor payments, client payments, and business-related expenses.
Maintaining a positive balance and avoiding overdrafts can reflect positively on your business credit profile. This also simplifies tracking business expenses and income, which is vital for financial management and tax purposes.
Start with a Business Credit Card
Applying for a business credit card is one of the easiest ways to build business credit. Some lenders offer secured business credit cards even if you have a low personal credit score. These require a security deposit, which acts as collateral and reduces the lender’s risk. Use the business credit card responsibly by keeping your credit utilization low and making timely payments.
This responsible borrowing behavior will be reported to business credit bureaus, helping to build your business credit score over time. Remember, using a business credit card solely for business expenses and avoiding mingling personal purchases can also protect your personal credit.
Establish Trade Lines with Vendors
Another effective method to build business credit is establishing trade lines with vendors or suppliers that report to business credit bureaus. Many suppliers offer payment terms, such as net-30 or net-60, which allow you to pay for goods or services within 30 or 60 days. Paying these invoices on time or early can positively impact your business credit profile.
Not all vendors report to business credit bureaus, so working with those that do is essential. You can ask your current suppliers if they report your payment history or consider seeking new vendors that do. Consistent, on-time payments will help you build a strong credit history for your business, which is crucial for securing future credit lines or loans.
Responsible Borrowing: Keeping Accounts Separate
When building business credit, practicing responsible borrowing and keeping your personal and business accounts separate is essential. Using personal credit to finance business expenses can put your personal assets at risk and also affect your personal credit score if the company encounters financial difficulties.
By keeping your business and personal accounts separate, you can more accurately track your business expenses and income, which is vital for maintaining a clear financial picture. For instance, if you need quick access to cash to cover a personal emergency bill, such as a hospital visit, you can apply for an online loan through MoneyKey, a lending company that facilitates loans online. If approved, keeping the loan record separate from your business expenses is essential to avoid mixing up.
Responsible borrowing also involves understanding the terms of any credit you take on. Before securing a loan or line of credit for your business, carefully review the terms and ensure that your business can meet the repayment obligations. Borrowing responsibly will protect your financial health and contribute positively to your business’s credit history.
Monitor Your Business Credit Reports
As with personal credit, monitoring your business credit reports regularly is essential. Business credit bureaus compile credit reports that lenders use to evaluate your business’s creditworthiness. Regularly reviewing these reports helps you track your progress and identify any errors or discrepancies that could negatively affect your credit score.
Experian recommends monitoring your business credit report and score for at least three months before applying for a small business loan. This helps you make necessary improvements and ensures everything is accurate. After securing the loan, recheck your report to verify its impact on your credit score.
If you find any inaccuracies, dispute them with the credit bureau to have them corrected. Monitoring your business credit reports also allows you to see which areas of your credit profile need improvement, such as reducing credit utilization or increasing the diversity of your credit accounts.
Build Relationships with Financial Institutions
Establishing strong relationships with financial institutions can be beneficial when building business credit. Developing a relationship with a local bank or credit union can allow you to access small business loans or lines of credit. Smaller financial institutions may be more willing to work with businesses with lower personal credit scores, especially if you have a solid business plan and demonstrate responsible financial management.
Maintaining an active line of communication with your bank can be helpful in times of financial uncertainty. A good relationship with your banker can result in more flexibility and understanding if you need to negotiate payment terms or secure additional funding.
Conclusion
Building business credit with a low personal credit score requires patience, discipline, and strategic planning. You can establish a strong business credit profile by separating your personal and business finances, responsibly managing business credit accounts, and consistently paying vendors and lenders on time.
This will improve your business’s ability to secure financing in the future and enhance its overall financial health and credibility. With dedication and responsible borrowing practices, you can navigate the challenges of building business credit and pave the way for your company’s success.
Lynn Martelli is an editor at Readability. She received her MFA in Creative Writing from Antioch University and has worked as an editor for over 10 years. Lynn has edited a wide variety of books, including fiction, non-fiction, memoirs, and more. In her free time, Lynn enjoys reading, writing, and spending time with her family and friends.
