11/22/2021

Business Banking

How to build business credit without using personal credit

Building business credit is important for securing loans or credit cards for your business. Here's how to do it without relying on personal credit.

Tim Wu
Tim Wu

Head of Growth

Table of Contents

Quite a good number of small business owners use personal credit to manage their business finances. This is never a good idea because your business activities can negatively impact your personal credit. To avoid such a scenario, consider building your business’s credit and use it instead.

That will ensure your personal credit remains intact. Better yet (in a business context), your company will easily qualify for better terms when applying for a loan or credit. So, however you look at it, building business credit is a win-win for you and your company.

Is your business credit related to your personal credit?

As a sole proprietor, your business credit is not necessarily linked to your personal credit, but they are closely related. The thing is, business and personal credits collect different information. For this reason, the two scores are not necessarily linked.

However, if you are a sole proprietor, it’s more than likely that lenders will perform a personal credit check for reference when lending to your business. They do this to see how well you manage your personal debts, which may be an indication of how well you can manage business debts.

Nonetheless, you can still take steps to ensure that your business and personal credits are completely separate. Doing so will give you the chance to build business credit without using or impacting personal credit. Here are the 10 steps to follow.

Incorporate your small business

Incorporating your business or forming a limited liability company (LLC) ensures that your business entity is separate from your personal entity. This is different from a sole proprietorship, where you can’t distinguish yourself from your business. As a sole proprietor, you’ll need to personally guarantee all your business debts and liabilities, which blurs the line between business and personal credit.

On the other hand, if you incorporate your company, you can take out a loan for the business without using your personal name or social security number. This prevents you from becoming personally responsible for company debts. And of course, it allows you to take out credit in the company name. As long as you’re disciplined in repaying the debt, the business’s credit score will start to improve.

When incorporating the business, make sure to get a phone number that’s listed under the business name. It will put some extra distance between you (the person) and your company.

Get an EIN

Also known as a Tax Identification Number, an Employer Identification Number (EIN) is a unique, nine-digit number that the IRS issues to businesses for identification purposes. You primarily use it to file tax returns, but financial institutions and government agencies tend to ask for it before doing business with private companies. It’s like a social security number, but strictly for businesses.

Getting an EIN is completely free. And although sole proprietorships and single-member LLCs are not legally required to have one, it’s recommended that you get it for your business anyway. It serves to identify your business as a separate legal entity, distinguishable from you.

Learn more about EIN here.

In doing so, the EIN effectively differentiates your personal credit from business credit. You can apply for business loans and take up other business liabilities using strictly the EIN and not your social security number. Again, as long as you service the debts in a disciplined way, you’ll get points on your business credit while keeping your personal credit away from business activities.

Register with Dun & Bradstreet

Among other things, the Dun & Bradstreet Corporation provides commercial data and analytics for businesses. They are mostly known as a credit bureau that assigns businesses with the Data Universal Numbering System (DUNS number). This nine-digit number is free for all businesses and is your company’s unique identity when it comes to credit checks.

Just as you have FICO for your personal credit, your company has Dun & Bradstreet. They issue PayDex scores, which is the business equivalent of FICO scores. Thus, instead of lenders checking your personal score, they’ll check your business’s creditworthiness using its PayDex score.

By having this number, you essentially create a distinct line between your personal credit and your business credit. Every time you service a debt properly, your business’s PayDex score improves. Therefore, the higher the score (on a scale of 100), the more reliable the business is in meeting its debt obligations.

If, for one reason or another, you do not want to use Dun & Bradstreet, then you’ll be glad to know that there are other major credit bureaus for businesses, including Experian and Equifax.

Separate business finance from personal finance

Separating your business finances from personal finances is important for building business credit. It ensures that business debts are distinct from personal debts. As such, your business credit cannot be affected by personal liabilities. The flipside is that your personal assets won’t be affected by business debts either because separating business and personal finances gives you limited liability.

Apart from incorporating your company, the next easiest and most effective way of separating business finance from personal finance is opening a dedicated business account. Make sure to use the business’s legal name and EIN when opening the account.

Here’s a step-by-step guide on how to open a business bank account.

Let all your business transactions flow through this account. Having all the transactions in one place will save you a lot of time when it’s time to account for your revenues and business expenses, and also when filing tax returns.

Pay creditors on time

One of the most effective ways of building credit is by taking credit and repaying it on time. Better yet, you can pay early as long as there are no prepayment penalties. Late payments, on the other hand, will reflect poorly on your business credit profile. In fact, most lenders and vendors do not offer the 30-day grace period that you typically get when you fall behind with your personal credit.

This, however, doesn’t mean that you should be afraid of credit. As mentioned, getting credit and repaying it on time is an effective way of building business credit. So, don’t run away from business loans and business credit cards.

Use business cards to pay bills, pay for fuel, buy food, pay travel expenses, and so on. Just make sure that you make card payments on a timely basis. While at it, do not use your personal credit card for business purchases and expenses. Doing so will mix business finances with personal finances. Stick to the business credit card and mix it up with affordable loans and lines of credit.

How is a business line of credit different from a business loan? Here’s everything you need to know.

Establish tradelines

A business tradeline is a line of credit that you establish between your business and a vendor. The vendor allows your business to take products on credit. Depending on your agreement with the vendor, they may give you weeks or even months before you have to start paying the account balance. You can get a tradeline for inventory, stationery, shipping services, or pretty much any other goods/services that your business frequently needs.

Although they are not required to, most vendors usually report tradelines to business credit bureaus. This makes tradelines particularly important for building business credit. The vendor may report information such as the amount owed, your available credit, terms of your account, how quickly you pay (relative to your due date), and your recent activity.

It’s completely possible to have a business credit report that doesn’t take tradelines into account. However, you’ll find it very difficult to build business credit without tradelines. That’s because your total number of tradelines and your payment history are contributing factors to your business credit.

Use vendors who report to Dun & Bradstreet

Tradelines with vendors are essential to building business credit. But as already mentioned, not all vendors report your payment activities to credit bureaus. Such vendors won’t help you build your business PayDex score even if you’re disciplined in managing business credit.

For that reason, you may want to open tradelines only with vendors who report to Dun & Bradstreet and other credit reporting agencies. You can ask the vendor if they report tradeline accounts and which credit bureaus they report. Just make sure that they don’t include your personal credit report when reporting.

Also, make sure that the vendor doesn’t charge an annual fee to maintain your credit account. You don’t want a tradeline that might end up being too expensive owing to additional fees and charges. There are more cost-effective credit options out there that can help as much as tradelines.

Request for trade credit

As a small business, you won’t always have the cash to pay for goods and services upfront. Juggling between necessary expenses, getting supplies and servicing credit may strain your finances. In a worst-case scenario, this can force you to default on credit payments. That will certainly harm your business credit in a huge way.

The solution? Request for trade credit from vendors and suppliers. For example, vendors with net-30 accounts will give you up to 30 days to pay an invoice. This frees up some cash for at least 30 days, cash that you can use to service the most urgent credit.

Trade-credit accounts are interest-free. And if you use vendors who report to credit bureaus, your timely payments will help build your business credit history without incurring any additional costs.

Check your business credit reports for errors

Credit bureaus like Dun & Bradstreet, Experian and Equifax gather information from many different sources. Alongside your company name and contact, your business credit report includes your business type, industry, key personnel, sales, available credit, payment history, tax liens, lawsuits, bankruptcies, and credit score.

All this information is critical because it reflects on your business in one way or another. Your PayDex score, for example, determines your business’s creditworthiness. You’ll want to ensure that all the financial data that goes into that score is accurate. Errors and inaccurate figures can lower the score through a fault that’s not your own, and despite your best efforts to meet your business financial obligations.

For that reason, regularly request for your business credit file. Check that all the information is accurate and personally contact the credit bureaus to report any errors.

Keep building your personal credit

Even if your primary focus is building business credit, do not neglect your personal credit. As mentioned, your business credit is not linked to your personal credit, but they’re closely related. It’s a very thin line between these two, and despite your best efforts to separate them, creditors might still reference your personal credit history before lending to your business.

The thing is, if your personal credit prevents your business from accessing funds, it means that the business won’t have liabilities that it can repay to boost its PayDex score. If you don’t have loans, lines of credit and credit cards to service, you can’t really build your credit. For this reason alone, you may want to ensure that your personal credit score is high and constantly improving.

The line between personal and business credit will always be blurred because creditors continue to rely on blended data that considers your personal and business credits.

Why your business credit matters

The fact that you’re trying to figure out how to build your business’s credit means that you acknowledge how important it is to business growth. Below are reasons why your PayDex score matters:

1. Access to finance

Your business credit score is a gauge for the company’s reputation when it comes to handling credit. A good score means that you’re a good debtor, which in turn increases your access to business loans and credits. You need this kind of financing to grow the business.

2. Affordable financing

If you have a high FICO score, you can get your hands on personal credit that comes with excellent terms like low interest rates and fees. The same applies to business credit. A good PayDex score exposes your business to affordable credit, including low-interest loans, cheap business credit cards and loans with no fees. In fact, your business insurance premiums, lease agreements, and vendors’ terms may be determined by your credit score.

3. Improved business-to-business relationships

Think of your business’s credit score as a measure of its character. It affects how other businesses, including vendors, suppliers and lenders perceive you. Good credit increases the chances of other businesses wanting to work with you. If you have bad credit, they will consider your business high risk and won’t want to partner with you.

4. Separation of business and personal finances

If your business has a good credit score, you can use that score to access credit. You won’t have to offer a personal guarantee for business liabilities using your personal credit score. This separation helps you keep business finances distinct from personal finances.

5. It’s hard to repair business credit

The Fair Credit Reporting Act only applies to consumer credit, not business credit. For that reason, once your business credit is damaged, you’ll find it extremely hard to repair. The best thing to do is be proactive and build the business credit from the get go. Even if you’re not planning to take any loans or lines of credit, it won’t hurt to have a good business credit.

Start building business credit with Nearside

It typically takes a minimum of six months for your business to generate its first credit score. You’ll need even more time to establish a good or excellent score. The upside is that if you’re starting from zero, then regular credit activity will give you a more-than-decent score in those first six months.

In short, start building your business credit now for the benefit of the future. Nearside can help with that. The Nearside Business Checking account helps you separate your personal and business finances. Once you’ve done that, you can focus on building business credit without impacting personal credit.

And Nearside can help with that, too. Better yet, the Nearside account doesn’t have NSF fees, monthly fees, or minimum deposit requirements. We believe small businesses should retain as much of their profit as possible and use it to grow their business or build their credit.

Sign up today and enjoy a free modern checking account for small businesses.

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