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A major step in any business is finding financing and that’s difficult to do without having business credit. One problem many business owners face is building business credit when their personal credit score isn’t great.
Lenders look for good personal credit scores to lower their risk when lending to new businesses. It might take some work, but you can find a lender that only needs your EIN to qualify for credit cards, loans, and other options.
There are several steps you can take to build your business credit without a personal guarantee. We’ll show you exactly how it’s done.
Step 1: Choose A Company Name And Contact Information
This step might seem like common sense, but many small business owners do it wrong. Your clients need a way to find your business when they’re ready to spend money with you. So a variety of contact information is key to building your small business.
Choosing a name might be the hard part, especially if someone else already has a business registered under that name. You can do a quick search online to see if that’s the case.
You’ll want to have the following information for your business:
- Business name
- Phone number
- Business address
- Professional email
- Website address
All of the above information needs to be completely separate from your personal information. There are business lenders that will deny your application if they see that your personal address and business address are the same.
Similarly, your email address should be connected to your business website, not a free gmail or yahoo account.
Presenting a professional image for your business sets the foundation for customers, investors, and lenders to take you seriously.
Banks regularly check to ensure that your business is legitimate as part of their due diligence before lending out money. They may perform online searches, verify the business phone number, and may even make a visit to your storefront (if you’re a retail business).
Most business credit coaches advocate that you get your business listed in the 411 directory as well.
Step 2: Establish a Business Entity
Nailed down a name and listed your contact information? Now it’s time to register your business entity with the state. You have to make it official so your business is a separate entity from you personally.
Registering your business as a legal entity is an easy process. Most times it can be done online through your state’s website for a moderate registration fee. If your industry requires professional licenses, be sure to have those in place ahead of registering.
Depending on how your business is legally classified, you’re able to create a separate entity from your personal identity. With a sole proprietorship, that’s not possible. You’ll have to file for a limited liability company (LLC), small business corporation (S-Corp), C-Corporation or LLP to achieve that.
Just because you have your business registered with the state doesn’t mean you’re building business credit. Although this makes your business legitimate, there are a few more steps before you start building credit.
Again, this is important because many business lenders won’t lend to sole proprietors. Filing an LLC in most states is cheap and easy – don’t skip this step!
Step 3: Get An EIN Number For Your Business
Next up is your EIN. Registering your business may have cost you something, but luckily this part is free. Your EIN is an employer identification number and is only issued by the Internal Revenue Service (IRS).
Getting an EIN from the IRS’s website is super easy and quick. It only takes a minute or two (literally), and their website grants it to you immediately.
It tells the government and credit bureaus that you’ve opened a business. If the credit bureaus don’t know you’ve started a business, then they can’t create a credit profile for you.
Getting an EIN is also important because it acts as an identifier for your business similar to how your SSN identifies you as a person. You’ll need it to:
- Open business bank accounts
- Get a business credit card
- Apply for loans, grants, and other financings
- File taxes and report employee wages
Typically when applying for a business credit card or a loan, the financial institution will ask for your SSN to complete the application. The problem is that it makes you personally liable for the credit account instead of your business. That’s not what you want.
Look for banks and lenders that accept EIN-only applications. This is the best bet for building credit under your business.
Step 4: Open Up A Business Bank Account
Your business bank account helps keep your business and personal funds separate. At least that’s the idea behind it. It only works that way if you strictly use the account for business expenses and deposits. While you’re at it, a savings account won’t hurt either.
Opening a business checking account doesn’t have the same effect on your credit as opening a credit card or loan, but it does establish a connection between your business and the bank you’re working with.
Applying for a business credit line without business credit? During your application process, the lender may look at the average balances in your business account to help them decide between approval and denial.
This isn’t the case with all lenders, but some do require a substantial balance in the bank account to approve your application if you’re not going to apply with your personal credit.
Step 5: Apply For A DUNS Number
Business credit bureaus like Experian, Equifax, and Creditsafe start building credit reports for your business as soon as they receive data from your creditors. No request is needed. When your vendors report payment history to them, it helps you build good business credit.
But not Dun & Bradstreet. With them, you’ll need to request a DUNS number before receiving a business credit score from them. Without a DUNS number, your business isn’t visible to their credit bureau. Luckily, the registration process is free and easy.
It may take up to 30 days for you to get your DUNS number after requesting one, so tackle the request first and move on to the next step while you wait.
Getting a DUNS number opens up new opportunities as well. Not only does it allow you to apply for federal grants, but it’s also required information when bidding for government contracts.
Step 6: Open Business Tradelines
Business tradelines are the next tool in your business owner’s toolbelt that can help you build good business credit. Tradelines are lines of credit extended from vendors and lenders to businesses.
Vendors usually set net 30 accounts which allow businesses to repay the line of credit within 30 days. Tradelines might also be business credit cards, small business loans, and other forms of financing. Here is a great place to start researching if you’re looking for a credit card as a new business: Startup Business Credit Cards with No Credit.
But not all tradelines are built the same. If you’re looking for one tradeline, check out our Credit Suite Review.
Most starter business tradelines are vendor credit, but some business tradelines are financial tradelines. This includes secured business credit cards and business credit builder loans.
You want to find the tradelines that:
- Report to the major business credit bureaus
- Don’t require a personal guarantee
- Don’t have an annual fee
Before signing up for new trade credit, it’s important to check which credit bureaus they report to and how often they report. A big difference between personal credit and business credit is that lenders and vendors aren’t required to report payments to business credit reporting agencies.
Each account under your personal credit reports to at least one consumer credit bureau, but business lenders aren’t required to report at all. Without reporting, you can’t build credit. Make sure you’re choosing lenders that report to the credit bureaus regularly. Also check out our Business Checking vs Personal Checking to know more about the checking account side of things.
With two or three tradelines, you may see healthy improvements in your credit score.
BILL Divvy Corporate Card
The BILL Divvy Corporate Card allows you to build business credit without the personal guarantee of other business credit cards.
If your business doesn’t qualify for their unsecured credit card, then they also have a secured line of credit that they can offer you. Your credit limit depends on the amount you decide to pre-fund the business card.
Since it doesn’t depend on your personal credit score to qualify, you’re able to work towards an unsecured line of credit while you build your credit on a pre-funded amount. So even business owners with bad personal credit can qualify with this credit card issuer.
They report your payment history to D&B and the SBFE monthly so you can start building business credit fast. Using their business card comes with rewards too. Learn more about BILL’s corporate card and see if it’s the right fit for your business.
Remember that the SBFE reports your payments and activities to other business credit bureaus, so your payments to BILL Spend & Expense will help build your business credit scores for Experian and Equifax, too.
Nav’s Business Boost Plan
Nav is a business credit monitoring service. On top of offering one of the only free business credit reports, they also offer vendor tradelines.
With Nav, it’s not just about the tradeline. You’re getting full business credit reports, up to $1 million in identity theft protection, cash flow insights, and more. It’s the perfect way to manage your business credit and build it at the same time.
Nav has two tradeline reporting options. The Business Boost and the Business Loan Builder plans. Both have affordable monthly payments and report to each major credit bureau. If you slipped up with a late payment, don’t worry. Nav won’t report negative information to your credit report.
CreditStrong Business Credit Builder Loan
CreditStrong offers both personal and business credit builder loans for people looking to improve their credit history. Their business credit builder loan has two flexible payment options that allow you to make the best decision for your business finances.
They boast features like:
- Reporting to PayNet, Equifax, and the SBFE
- No hard credit check
- No upfront security deposit
By the end of the loan term, secured funds get released to you. Making this a great option for small business owners who don’t have good credit. Unlike Nav, they will report negative information if you miss any payments, so you’ll have to keep up good payment practices.
Step 7: Make Payments Early And Keep Your Balances Low
No matter what credit card or business loan you go for, your payment history and credit utilization are still important. You know how payment history is the most important factor in your personal credit history? Well, it’s the same way for your business credit score.
If you’ve been managing your personal credit score for a while, you may have noticed that late payments don’t affect your credit score until it’s 30 days late. This isn’t the case for business credit.
A late payment under a business line of credit will show as the number of Days Beyond Term (DBT) on your credit report, even if you’ve only paid three days late. This impacts your business credit score. If you can do it, make your payments early.
Another way to increase your credit score is to keep your credit utilization low. You wouldn’t let your personal credit card go beyond 30% of your credit limit, so the same goes for your business credit card.
Step 8: Monitor Your Business Credit Reports Regularly
Doing all this work to build your business credit up could be undone without monitoring your credit reports. You’ll want to make time to review your business credit reports at least once a month. This helps you keep track of your progress from opening new tradelines.
It also allows you to check for any errors in your business credit history. If you happen to find an error in your credit report during your monthly check, you can quickly dispute it with the credit bureau.
What’s The Difference Between Business Credit And Personal Credit?
The way you manage personal finance is the same way you’ll manage business finances. That’s how some business lenders think. So it makes sense that some lenders choose to review both before approving you for a loan.
However, there are distinct differences between business credit and personal credit.
- There are strict laws and regulations around personal credit and how it’s reported. Business credit has much less regulation and vendors aren’t required to report to credit bureaus.
- Business credit score ranges vary; several go from 0 to 100. Whereas most personal credit scores go from 300 to 850.
- The way the business scores are calculated is different from the calculation for personal credit scores.
- Under personal credit, late payments don’t impact your score unless it’s 30 days or more. With business credit, any DBT has a negative impact on your score.
Those are just a few of the differences between the two. There are even substantial differences between how business credit cards and personal credit cards are used.
How Long Does It Take To Establish Business Credit?
If you’re following along with all of these steps and diligently making on-time payments to your tradelines each month, you should start to establish good business credit within six months to a year.
Ultimately, it depends on your ability to manage multiple accounts, make early payments, and keep your credit utilization low. This takes some people longer to master than others. Once you establish good business credit history, you can move from actively improving it to monitoring it.
So whenever you need to get the financing to expand or improve your business, you’ll be able to get it with the best possible terms.
All in all, it takes a bit of work to establish your business in a way that supports building business credit. Although most lenders might request a personal credit check, not all of them do.
Open tradelines, be responsible with them, and keep track of your credit. Within a short period of time, you’ll be able to finance your business to achieve your goals.
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Seychelle is a Maryland-based personal finance writer and business owner. She’s passionate about helping others out of financial pitfalls she’s already dug herself out of. Most of her finance knowledge stems from her career as a Financial Consultant and Branch Manager at the 7th largest US bank. Read more of her work on credit, budgeting, debt consolidation, and entrepreneurship at www.seychellewrites.com