If you’ve never run a business before now, or someone else has always been the financial manager, you might be surprised to learn that your personal credit score can control your access to business credit. This doesn’t apply when your business already has an independent, established credit history. However, it’s applicable when you’re starting a new business.
When you apply for credit for your business entity, lenders will look at your personal credit to make their decision. The same goes for other owners in the company. If nobody has adequate credit, you’ll probably get denied. However, that’s not the end of the road. It is possible, and not that hard, to build business credit in other ways.
Without business credit, it’s hard to get off the ground. You can only go cheap for so long before you need to invest in equipment, better quality technology, industry software, and a team of employees.
Before diving into how to build business credit with bad personal credit, here’s why your personal credit matters.
When you’re new, lenders look at your personal credit
A new business that doesn’t have a history of making payments that get reported to the credit bureaus won’t likely be approved for unsecured loans. That’s why lenders look at the business owners’ personal credit history to make their decision. If you have stellar credit history with a high score, lenders will use that information to issue your business a line of credit they feel is appropriate.
Once you get that first line of credit for your business, you can use that to build even better credit. It’s just getting started that can be a little difficult. Bad personal credit can result in denials for your business. However, it’s not impossible to get business credit.
How to establish strong business credit from scratch
When trying to build credit for your business, you might run into some snags along the way. Bad personal credit is one such obstacle, and if you need access to capital, you’ll need to have a plan.
Here are some tips for getting access to the funds you need to build your business while making sure you build great credit in the process.
1. Partner with someone who has great credit
One of your best options is to take on a business partner who has great personal credit. This will work great if you’re starting an LLC and you’re partnering with someone you know and trust. Naturally, if you ask just anyone to partner with you to use their good credit, they’re going to be skeptical. If you do it this way, you’ll have a hard time finding a business partner.
Reach out to your friends and business contacts to find out if anyone might be interested in taking on ownership in your company. Be upfront about needing someone with good credit to benefit the business. You might find someone willing to use their credit to get your business going in exchange for a percentage of ownership.
2. Fix your personal credit ASAP
It’s not necessarily the fastest way, but it should be at the top of your list, regardless. Start now and fix your personal credit as much as possible. It will be a good move for your personal life, too.
Begin by requesting a copy of your credit report from all three main bureaus – TransUnion, Equifax, and Experian. You are entitled by law to obtain a free copy of your credit report from each of these agencies once per year.
Look over your report and make sure everything is accurate. Verify your personal details, your credit limits, open accounts, unpaid balances, and accounts in collections. If anything is inaccurate, follow the bureau’s procedures for requesting that your information be corrected. You’ll need to explain your dispute in writing.
If for some reason you can’t get a credit bureau to remove incorrect information, hire an attorney to do it on your behalf. For instance, in Florida, it’s a violation of the Florida Fair Credit Reporting Act (FCRA) for a credit bureau to refuse to remove inaccuracies from your report. If that happens, an FCRA attorney will get it done for you fast.
3. Get a secured credit card
Another great way to build business credit is by getting a secured business credit card. With a secured card, you will be given a small credit limit to start – say $300 – and you actually give your lender that same amount ($300) to hold as collateral. Then, you are free to spend up to your $300 limit, but you still must pay the bill every month. It doesn’t get taken out of the $300 you gave your lender. That’s just there for security in case you default.
Once you establish reliability by making regular payments on your secured credit card, it will begin to impact your credit report positively. In turn, this will help you get other lines of credit, including unsecured lines. You’ll also have the option of increasing your credit limit on your initial secured card, which can help you with business expenses and build credit at once.
4. Pay your bills on time and in full
The best way to establish credit is to pay your bills every month on time and in full. There’s no benefit in carrying a balance – that’s a proven myth. If you keep a balance, all that does is give the lender more money in interest payments.
Usually, when you get a credit account, you won’t have to pay interest for the first year or two, unless you don’t pay your monthly balance in full. You can avoid interest for quite a long time by paying your bills promptly. Paying off the balance early works great, too.
Start building business credit today
Don’t wait to start building credit for your business. The sooner you get started, the faster you’ll have access to capital for essential expenses and the resources you need to grow your business.
