Personal savings and internally generated cash are relatively low-risk ways to start and grow your business. But if you really want to adopt an abundance mindset by scaling it, accelerating growth, and still staying on top of cash flow, you will need business credit.
In many cases, lenders will use your personal credit score to gauge the credit risk of your small business. This can be a pain if your score is unsatisfactory. Fortunately, a poor personal credit score does not have to be an insurmountable obstacle to building good business credit.
Is Business Credit Based on Personal Credit Score?
Strictly speaking, business credit is based on your business’s financial activity and is separate from your personal credit accounts.
Nevertheless, personal credit and business credit can still be connected especially if you are running a sole proprietorship or a company with limited credit history. In this case, establishing business credit from scratch would usually commence with demonstrating strong personal credit.
If you think about it, this approach is only rational. If you have great personal credit, a lender will view you as adept at managing business finances as well. It shows you take your financial obligations to investors, partners, and vendors seriously.
Now, the downside here is that not every entrepreneur comes to the lender table with a stellar personal credit score.
The good thing is you can develop excellent business credit despite a disappointing personal credit score. I’m about to show you how to build business credit without using personal credit. But first, let’s take a quick look at a key distinction between business credit and personal credit especially in how each is computed.
Business Credit vs. Personal Credit Calculations
Personal credit scores are based on five major factors. For FICO scores, the calculation is based on payment history (35%), credit utilization (30%), length of credit history (15%), credit mix (10%), and new credit (10%).
Business credit adopts a different approach. The primary focus is on payment history (most important), length in business, number of employees, and public filings. This data is mainly collected by three business credit reporting bureaus– Dun & Bradstreet, Experian Business, and Equifax Business.
Unlike a personal credit report, business credit reports do not list the names of creditors. And they rarely report credit limits. Also, there are no restrictions on who can check a business credit report– from customers and vendors to lenders and regulators.
Of course with personal credit, privacy is understandably a huge concern. There are restrictions on who can see the report.
1. Create an EIN If You Haven’t Yet
Apply for an Employer Identification Number (EIN). It is a business identifier for tax reporting purposes. You get the EIN from the IRS for free.
The EIN gives you an alternative path to applying for business credit. Think of it as a Social Security number (SSN) for businesses. You can then use the EIN to open savings and business checking accounts.
The IRS will still require that you provide an SSN when applying for an EIN but this has no impact on your credit score since the Federal Revenue Service will not pull your credit history.
2. Establish Your Business’s Name, Address & Phone Number
The EIN is one aspect of giving your business a distinct identity. You need to establish a business name, a verifiable address, and a phone number too. Make sure the phone number is listed under the business name. Also, open a business bank account in the business name and start to regularly use it to pay bills.
Register the business on Dun & Bradstreet and get a D-U-N-S number. Dun & Bradstreet (D&B) is the largest business credit bureau in the US.
You may be issued with a Paydex score which is the business equivalent of a personal credit score. However, you must have three or more credit lines to be Paydex-eligible. The PayDex score runs from 1-100 and reflects the business’s creditworthiness.
Once your business has at least five credit accounts reporting to Dun & Bradstreet, you can be approved for accounts with large corporations without the need for a consumer credit check or personal guarantee. These include Walmart, Costco, Dell, Apple, and Target.
3. Apply for Tradelines With Your Vendors
Apply for a vendor tradeline under your business name and EIN. Vendor tradelines are lines of credit extended by your vendors and suppliers. The vendor allows you to pay the account balance days or weeks after you receive inventory or service.
For a new business, vendor tradelines can be one of the most accessible sources of credit even when you have less than impressive personal credit. Something as simple as net 30 payment terms with a water supplier or a business credit builder loan from Credit Strong can be the beginning of building business credit.
As you apply for a tradeline though, find out if your account will be reported to business credit bureaus. Not all vendors do. You want your good payment habits to go on record and help build your business credit track record.
The good thing is that in the event that you have a tradeline that the vendor does not report, you can still get some credit for it by listing it as a trade reference in your account.
Depending on the type of business credit report, tradeline data relayed to the reporting agencies would usually include your available credit, the amount owed, terms of credit account, when you pay relative to the due date, and recent activity.
Keep your tradelines active and try to make a purchase at least once every 60 days. If your account goes dormant, the vendor will stop reporting.
4. Apply for A Business Credit Card
A business credit card is the quickest way to start building your business credit history. Apply for the card under the business name and EIN. The account activity can be reported to the business credit bureaus. Not all card issuers will accept an application that doesn’t include your SSN, but some will.
Bear in mind that when applying for the business card, the issuer may run a personal credit check and require a personal guarantee stating that you are ultimately liable for any business debts. So, if you default on the business’ debt with this guarantee, it could appear on your personal credit history.
5. Consider a Secured Business Card to Build Credit
If bad personal credit impedes approval for an unsecured small business credit card, apply for a secured business credit card. Again, do so under your business name and EIN.
Unlike a conventional card, secured cards require that you make a cash deposit. The cash deposit doubles as the credit line. When you off the balance of a secured card each month, it contributes points to your business credit score.
Just like vendor tradelines, ensure your card activity is reported to the business credit bureaus to help build your business credit profile.
6. Make Payments Early and Keep Your Balances Low
With personal credit scores, you are in the clear if you pay before the due date, Paydex works differently. Yes, you should make your business payments on time. But even better, do so early.
To have a Paydex score above 80, your business needs to consistently pay bills long before the due date. Paying bills early is viewed as a sign of a reliable business and good debt management.
Avoid late and delinquent payments as much as you can. They will drop your Paydex score and make it harder to access more business loans in the future.
Of course, paying off balances early should be done without jeopardizing the business’ own operations. So keep your tradeline and card balances at the minimum you need to without disrupting your business’ cash flow.
7. Check Your Business Credit Reports Regularly
When you are starting off, there will be little to see on your business credit reports. Still, it is important to form an early habit of checking your reports regularly. And too many small businesses do not.
A small business survey found that nearly a quarter of businesses do not know why a loan application has been denied. Almost half of small businesses don’t know they have a business credit score. A staggering four in five do not know how to interpret their business credit score.
It’s especially important to confirm that the credit accounts you open are being reported and also check that there are no errors affecting your credit rating. If you run into an erroneous item, file a dispute with the reporting agency.
Building Good Business Credit
With good business credit, you can qualify for debt without the need for a personal guarantee.
Even if you do not have an immediate need for business credit, it makes good financial sense that you start to establish your business credit early. Your vendor terms, business partnerships, office or equipment lease agreements, and business insurance premiums could be affected by it.
The business environment is inherently unpredictable and you never know what unexpected market shock could abruptly throw your cash flows off balance.
Final Thoughts on Building Business Credit Without Using Personal Credit
It is possible to get your business credit up and running without depending on your personal credit score. Still, you can and should do both in tandem. That is, build business credit while improving personal credit.
Having both excellent business and personal credit helps you qualify for better loan terms and rates on business financing. Start off by paying off your financial obligations on time and paying down your existing credit balances.
