Credit is a complex thing. It can be difficult to get, easy to screw up, and difficult to restore and business credit is the same way. If you've started a business and have tried to get a business credit card, business line of credit, etc you may have been asked to personally guarantee that loan or credit card. This guarantee basically means that you’ll be personally liable for the debt if the business is unable to pay it back — a situation that could put your personal assets at risk. Once you establish business credit, you may qualify for a business loan or credit without a personal guarantee.
Why would you need to personally guarantee a credit card or loan for your business? The exact same reason you may have needed a co-signer when you first started building your personal credit. We tend to think that when we open a business we can just automatically get all the credit cards and loans we want, but unfortunately, that is often not the case.
Business and personal credit work the same way. You have to be in a position to exhibit you can repay, have income, provide sufficient collateral (in some situations) and if you are asked to personally guarantee the loan, then your personal credit comes into play and if it's not up to par, you will likely be denied. It depends on the lender and their procedures — they may check your personal credit, especially when the business is young, business credit, or both.
> Check your credit — Business & Personal
Unlike with personal credit reports, there isn’t a legal requirement for the bureaus to give you free access to your business credit reports. All three of the major business credit bureaus — Dun & Bradstreet, Equifax, and Experian — will give you a full copy of your business credit report for a fee.
I recommend getting 1 report at a time. Ex. Get your Experian credit report and 4 months later get your Equifax report and so on. Each bureau can vary some, but not significantly so there is no purpose to get all three at once.
Check your business credit report here: Experian, Equifax, and Dun & Bradstreet. Although there are other places to check your credit, lenders can legally only use one (or all) of the three credit bureaus. So if your Credit Karma report is not updated, you're not doing yourself any favors. Additionally, lenders won't acknowledge a credit report you take into them.
> Establish your business credit
If nothing showed up when you checked your business credit report, then it has yet to be established.
A few things you can do are:
>> Incorporate as an LLC: This ensures your personal and business identities will be separate (Obvs). Albeit Sole-proprietors can build business credit, their personal credit will consistently be a factor since the Sole-proprietor is the business, there is no legal distinction between the two.
>> Get an EIN: If you are anything other than a Sole-proprietor, you are required to have an EIN.
>> Open a business bank account: You should have this already if you are operating.
>> Get a dedicated business phone number: It is rumored that having a dedicated business phone number does help with your business credit as it is a vendor you are paying (more on this beneath). In the event that you get one, it should be in your legal business name.
>> Register with Dun & Bradstreet to get a D-U-N-S number: This is a nine-digit number used to identify each physical location of your business. Similar to an EIN, but not. It can take up to 30 days for them to issue you a D-U-N-S number.
Business credit bureaus can use your EIN or D-U-N-S number to identify your business’s activities and payments, when reported, and business credit scoring systems can use the data to generate scores and reports.
Business credit scores can also take into account public records, such as legal filings, liens, and your business’s size and industry. But a history of on-time or early payments can go a long way in supporting you in creating a strong financial track record. Just like your personal credit.
> Apply for a business credit card
A business credit card can be a good start and are typically easier to get than a business line of credit. You can apply with your current business bank or online with any credit card company.
> Work with vendors that report payments
In addition to opening a business credit card, you can build your business’s credit by opening accounts with vendors that report payments to the business credit bureaus.
You may already have vendors that you pay on terms but ask (rather than assume) that they report the payments. If they don’t, consider opening accounts with new vendors after verifying they’ll report your payments.
> Pay those vendors early
One widely used business credit score, the Dun & Bradstreet PAYDEX® score, ranges from 1 to 100, with 100 being the best score. The score is based on your payment history with vendors.
Paying on time can get you a good score — up to 80. But what some business owners may not realize is that to get the highest PAYDEX score, you need to pay vendors early.
> Monitor your credit reports — Business & Personal
Errors and fraudulent activity can influence your business’s credit and make it troublesome — and increasingly costly — to borrow money.
Make a point of checking your business credit reports for mistakes a few times every year. (1 bureau at a time) If you find one, you can try to get it corrected by filing a dispute with the respective business credit bureau.
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The above is not legal advice nor does it create a consultant-client relationship. Please consult your lawyer or CPA or schedule your free consultation here.