How to build your business credit with bad personal credit
Wed | October 2022
In addition to a solid business plan and constant cash flow, your credit history significantly impacts how you scale and grow your business. Funders will look at your business credit to determine your creditworthiness as a company. Your business credit can establish your eligibility for financing and show prospective investors, vendors, and business partners that you are financially responsible.
This article will answer common questions about your business' credit: What's the difference between business credit and personal credit? How related is your business credit to your personal one? How to apply for business credit? And most importantly, how to build your business credit as soon as possible.
Business credit vs. personal credit
Your personal and business credit are not connected, but they might be related. What do we mean? The information in business and personal credit differs, so the ratings aren't always associated.
Business credit enables a company to borrow money to purchase goods or services. Business credit shows funders and vendors that your company is capable of borrowing money and meeting its financial obligations. It considers how long you've been in business and your payment history. Most importantly, anyone can access your business credit history, which means potential funders or customers can see your credit history. As you can see, a business credit score is part of your public image and keeping it in check is vital.
On the other side, FICO personal credit scores, for example, are calculated using the following five key factors:
Payment history accounts for 35% of your overall score.
Credit utilization accounts for 30% of your overall score.
Credit history length: 15% of your score.
Credit mix: 10% of your overall score.
10% of your score for new credit.
Is business credit based on or affected by personal credit?
Banks and other funders may likely check your personal credit if you're a sole proprietor to evaluate how well you handle debt. A funder might review your credit before providing business credit which is especially likely if a funder asks you to give a personal guarantee while applying for a small business loan or a business credit card. A personal guarantee essentially makes you personally responsible for the debt, which is something many may not want because it jeopardizes your assets.
Additionally, funders can link your personal and business credit if you run your company as a sole proprietor. That means that when you ask for business loans, your personal credit may be more important since funders will view you and the company as the same for financial purposes. Furthermore, once you've established good business credit, you may be able to qualify for financing without providing a personal guarantee.
If you want to learn ways around a bad credit score that can help make getting a small business loan easier: How to get a business loan or financing with bad credit.
How do I build my business credit?
You can do a few things to get started if you want to develop and build company credit without relying on personal credit. Here are some ways you can build business credit with bad personal credit:
First, you must open a company credit file with the three credit reporting agencies and secure an employer identification number (EIN).
The identifying number known as an EIN enables you to apply for loans and corporate credit cards. Similar to a Social Security number, but for your company.
However, one thing to keep in mind when obtaining an EIN. For your business to obtain an EIN, you must still give the IRS your Social Security number.
But don't worry; there is no personal credit score impact because the IRS does not pull your credit history.
Once you have an EIN, you may start working on your business credit applications, including business credit card applications.
Some company credit cards will let you apply with an EIN, despite many of them demanding a Social Security number.
As a small business owner, you'll need to think about alternative strategies for establishing business credit that doesn't rely on personal credit:
The simplest method might be to set up vendor trade lines.
These are simply credit lines you set up with your suppliers or merchants.
If you consistently make your payments on time, you can have good trade lines, which will aid in developing business credit.
Make sure all your business partners submit your account history to the main business credit agencies, which is crucial if you want funders and banks to recognize your prompt payment practices.
Finally, there's a third option for you:
You can also consider a secured business card.
A secured card may be your best option if poor personal credit prevents you from being approved for conventional small business credit cards.
Secured cards demand a cash deposit as both your credit limit and deposit.
Make sure the card you're opening reports to the business credit agencies like vendor trade lines.
Build the credit you want to have with One Park Financial
Another way to build your business credit is with fast working capital. Loans are another way to establish your business's credit if you make on-time payments every month. Business owners with bad credit can apply for working capital from various online funders. In One Park Financial, you can get pre-qualified in just minutes if your business has three months and makes at least $7,500 in monthly revenue! We specialize in helping grow businesses that have challenges with credit history.
Now more than ever, showing a funder what you bring to the table is essential to developing your business. But what are the most critical things to get funded?
Ensure your bank account is clean, has no negative days, has plenty of deposits, and keeps your daily balances high.
Have a bank account that reflects your less-than-excellent credit score.
Have a healthy stream of sales, and manage their bank accounts well.
Keep your bank account squeaky clean.
Ready to get started? Please fill out our form, and one of our funding experts will find the best option for you and your business!
Disclaimer: The content of this post has been prepared for informational purposes only. It is not intended to provide and should not be relied on for tax, legal, or accounting advice. Consult with your tax, legal, and accounting advisor before engaging in any transaction.