Business Expansion

How To Grow Your Business Credit Even If Your Personal Credit Is Poor

Last updated on November 6, 2020

Jacques Famy Jr

Whether you’re just starting a small business or a seasoned entrepreneur — understanding the differences between business credit and personal credit is crucial.
First and foremost, you should know that your business credit and personal credit aren’t necessarily linked, but they do relate to one another. They both contain different information, but that doesn’t mean they’re completely separate when it comes to business ventures.

What do we mean?

Well, sole proprietors, for example, will often have their personal credit looked at by banks or other lending institutions for reference as to how well they manage debt or financing. However, it’s not just sole proprietors, as many lenders will review personal credit before offering cash.

It’s even more likely if you’re planning on signing a personal guarantee, as these make the borrower personally liable for the debt issued. These are common with small business loan products or business credit cards and could be a sound option for some business owners that haven’t had time to build business credit. Some people also choose to use personal loans for business instead of business loans. However, it does put personal assets at risk if you’re unable to pay back the loan.

As businesses grow, successful entrepreneurs do their best to separate business and personal finances as much as possible. But what if you’re not there yet? How can you build your business credit? What happens if your personal credit is less than stellar? Is it possible?
These are all questions we’ve heard time and time again, and we’re here to tell you how to accomplish your goals and build business credit, regardless of your personal credit score. As we’ve said, you don’t necessarily need business credit to obtain financing for your business. There are no credit check business loans available. However, you should build your business credit as it opens doors to additional financing opportunities and makes your life a whole lot easier.

Why Business Credit is Crucial

There are a handful of reasons why business credit is imperative for business owners. We’re going to focus on the financial repercussions of poor business credit and the opportunities that emerge as a result of building upon this credit for a brighter future. If you have questions regarding what small business loans you can obtain with poor credit, check out: Common Questions About Getting Small Biz Loans With Bad Credit.
For now, let’s dive in.

Quicker and Easier Access to Business Financing

Applying for business loans can be a long and stressful process, but it’s made exceptionally easier with solid a business credit score. Cash flow problems are often unforeseen and pop up quickly, which causes a need for quick cash flow. The last thing you want is to be stuck with long applications and approval times. The higher your business credit score is, the faster and more likely you’ll get approved for financing products such as:

  • Small business loans
  • Business lines of credit
  • Equipment financing
  • And more

Lenders want peace of mind and proof that borrowers are able and willing to pay back loans on time. Even better, you’re more likely to get more attractive interest rates, the higher your business credit score is.

Better Repayment Terms

Not only will a higher business credit score give you more options when dealing with lenders, but also more attractive repayment terms with suppliers and vendors. Your business credit score is an indication of trust and reliability; it’s what positions you as an exceptional client. So, in turn, you’re more likely to receive more flexible repayment options that will better suit your business in the long-run, especially for businesses that rely on expensive equipment or machinery.

Safeguard Personal Credit Score

Last but not least is protecting your personal credit. A generally excepted business acumen is that you should try not to use personal credit for business purchases or expenses, as it can negatively impact that credit if things were to go south. Your credit utilization ratio gets increased with large business expenses that require personal credit. This will negatively impact your personal credit score and can incur some serious damage to your personal credit history over time.

Building business credit is not a fast endeavor.

Regardless of whether or not you’re planning on obtaining financing such as loans or lines of credits, building business credit is important for a wide range of reasons. It affects your lease agreements, insurance premiums, vendor terms, and even influence your partnerships with other companies.
For those struggling with personal credit, building business credit can seem like an impossible mountain to climb. We’re here to tell you that it’s not. While it may take time, you can take actionable steps that influence your business credit regardless of personal scores.

Here’s how to get it done.

Building Business Credit 101

1. Take the Proper First Steps

First and foremost, you’ll need to form a limited liability company (LLC) or incorporate your business. This step is crucial, as it separates your business entity from you, which will divide credit reporting. Before the credit bureaus are able to create credit reports for your business — they need to know it exists.

The IRS offers federal employer identification numbers (EIN) free of charge. Apply here to get started.

You’ll also need to open a bank account for your business under the legal business name.

2. Make Sure Business Credit Reports Have Correct Info

It’s not uncommon for business credit reports to have errors that may impact your ability to build credit. Business credit reporting agencies will collect information from a wide range of sources and may include:

  • Business contact information
  • Your industry and business type
  • Employee information (core personnel, number of staff, etc)
  • Years in business, subsidiaries or branches
  • Sales numbers
  • Financial data
  • Credit inquiries, use of credit, and collection accounts
  • Tax liens, lawsuits, bankruptcies, or fraudulent activity

It may also include business credit score information, recommendations from reporting agencies, and predictions regarding your business’s success.

3. Trade Lines Are Important

Tradelines can be an especially important piece of information on your business credit report. For many businesses, vendor relations play a crucial role in achieving success and even financing opportunities. Vendors have the option to report an account balance to credit reporting agencies — and bad rapport through late or missing payments could negatively impact your business credit score.

Tradelines are an easy way to build business credit if done properly. However, it’s an option for vendors to report this data — so if you’re attempting to build credit, you may need to open trade lines or business credit accounts with establishments that report information to credit bureaus.
Be on the lookout for annual fees and ask questions with vendors to ensure that they’re planning on reporting your payments to help boost your credit score.

4. Don’t Stop Working on Personal Credit

The lines between personal and business credit can get blurry, and we understand how confusing this can be for many business owners nationwide.

Yes, both business and credit reports identify differing information, some of which can be completely independent of one another. However, it’s more common now than ever for business credit scores to included some personal credit information.

So, as a general rule of thumb, we recommend that you assume your personal credit will be looked at — especially for sole proprietors. Even still, having sound personal credit is never a bad move, so don’t stop working on it!

5. Pay On Time (Or Early)

This is a bit of a no-brainer, but it’s crucial for building business credit. Whether it be with lenders, vendors, or business credit cards — payment history will be a crucial factor in your business credit score. Just like with your personal accounts, it’s important to pay on time or early. Even just a few days can impact your business credit score, so don’t be late.
Paying early can be beneficial, but make sure that you’re not dealing with a financing option that penalizes you for early payments (yes, those do exist).

It’s Slow, But Worth It

Building business credit takes time, and we’re not going to sugar coat it by saying it’s fast or easy. If your personal credit is struggling, that doesn’t mean your business opportunities need to hurt as well.

Don’t’ wait; start taking steps to build your business credit right now. You know the saying, “there’s no time like the present.” Well, that pertains to building business credit as well. If you’re looking for a more comprehensive guide, take a look at our tips for establishing and maintaining business credit.

Business owners should always be ready for the unexpected, and that means having solid credit histories for any bumpy roads that may pop up out of nowhere.

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