How Building Business Credit Can Protect Your Personal Credit
As a business owner, you have to build business credit, in addition to your personal credit profile. Building business credit may seem daunting when starting from scratch, but it can help you protect and preserve your personal credit score.
To detach your business activity from your personal credit, you’ll need to establish a strong business credit profile. We’ll walk you through a few steps you can take to start the foundation for your business credit profile so you no longer have to put your personal credit at risk.
The importance of building business credit
Your business credit reflects your financial history as a business owner and affects whether or not lenders would be willing to let you borrow money. Maintaining good business credit can help when you obtain business funding without having to rely on your personal credit history. The better your business credit, the less risky you become as a borrower.
A business credit score not only reflects your financial activity, but it also indicates your overall performance as a business owner. If you are irresponsible with your finances, it could damage your reputation among banks and lenders. A positive business credit profile could help you secure more favorable interest rates and terms on small business loans or credit.
Protecting your personal credit score
As you build your business credit profile, you would have to provide your personal information when filling out financial applications, especially for business credit. New entrepreneurs often are required to provide a personal guarantee to obtain a business loan or financing. A personal guarantee is a legally binding agreement that makes you personally liable to pay back debt.
Providing a personal guarantee when applying for business credit would make you responsible for paying the debt, in the event of your company defaulting. Once you’ve been in business for a couple of years and have a track record to prove you’re worthy of business credit, you may no longer need to provide a personal guarantee.
How to build business credit
Open a business bank account
As a starting point, business owners should open separate business checking and savings accounts to handle their business and personal expenses. Separating your expenses would help you maintain both your business and personal credit scores. Before building up business credit, you may have to rely on your personal credit score to obtain financing.
Open accounts with your business ID.
To establish business credit, you need to obtain an Employer Identification Number from the IRS after formally registering your business with your local authoritiesRE. Your EIN acts as an identification number for your business and should be used any time you apply for credit or a bank account.
Using your EIN in place of your Social Security number would link your financial activity to your business rather than your personal credit profile. Your business credit profile will become more robust as you continue to use your EIN.
Don’t bother with business credit cards.
Credit cards are often good tools to build your personal credit score. Using them responsibly boosts your credit profile. However, business credit cards do not impact your business credit in the same way.
Business credit reporting agencies differ from the three standard consumer credit reporting agencies, Equifax, Experian and Transunion. Popular business credit reporting agencies include:
- Dun & Bradstreet
- Experian
- Equifax
- National Association of Credit Management
Business credit agencies do not all collect the same information, and your business credit report could vary based on which agency it comes from. Major credit card companies like Visa, Mastercard and Discover often do not report activity to these agencies, which doesn’t do your business credit profile any favors.
Start small with store credit.
Small business owners would have a better chance of building business credit with companies that offer lines of credit. Those companies often report financial activity as trade information to business credit reporting agencies.
Supply stores like Staples, Office Depot and Lowe’s — or local suppliers — offer credit to business owners. Although credit would be limited to those merchandisers, it’s a good starting place for business owners to build their credit profile.
When you apply for credit from a supplier, you should ask which business credit agency the company reports to. It’s your responsibility to check with any credit issuer to make sure they report your activity.
Strengthening your business credit
Taking out credit with your preferred suppliers would be a small but effective starting point to build business credit. Once you have those credit lines open, be sure to keep your balances low and make payments on time or early. Paying off your balance in full each month would be a smart move as well.
Following best practices for managing business finances will help you to build a strong business credit profile so you would no longer have to rely on your personal credit and pose threats to your score.