Question

How do you build business credit when you have poor personal credit?

Answer 1

Business Credit refers to the creditworthiness or credit history of a business. It is central to lending decisions by banks. High business credit score reduces the cost of borrowing. While business credit is separate from personal credit, poor personal credit is a concern for entrepreneurs and sole proprietors, especially when personal guarantees have to be made while applying for a business loan or a business credit card.

Elucidated below are ways to improve business credit when having poor personal credit:

1. Establish business as a legally separate entity.

The first step in building business credit is to establish the business so that credit bureaus may create credit reports for it.

• Establish the business by either forming a corporation or an LLC (limited liability company). This also helps to shield personal assets.
• Obtain an EIN (Employer Identification Number) from the IRS.
• Obtain a DUNS Number (Data Universal Numbering System) by registering with Dun & Bradstreet. This helps to identify each physical location of the business.
• Establish physical location and separate phone lines for the business.

2. Maintain flawless business reports.

Credit bureaus gather information about the business from a variety of sources and hence it is essential that all reports available are accurate and complete.

• Verify all financial reports of the company including income statements, balance sheets, credit history and tax returns.
• Also verify public records of lawsuits, tax liens, bankruptcies, etc. and contact relevant bureaus to report and correct errors if any.

3. Utilise trade lines to build credit.

• Trade credit or business-to-business credit refers to lines of credit between a vendor and business. These are short term, typically for 15 to 30 days.
• Pay back trade credits on time and in full. This helps to create a positive credit history.
• Note that not all companies report trade credit to credit bureaus and therefore it is important to work with companies that do report.

4. Address personal credit problem.

Work on improving personal credit score. This is especially important while applying for large loans. Several banks look at FICO scores before approving loans. Check personal credit scores regularly and dispute and rectify any discrepancies in personal credit report.

After establishing the business as a separate entity and building trade credit, the individual can approach lenders for business loans. While approaching lenders, it is advisable to start with smaller loan amounts and using that to improve business credit by make timely payments.