We all grow up in the world of personal credit scores and credit histories. When you become a business owner though, your story changes a little. Suddenly, it’s not just your credit that you have to worry about – your business gets a credit history of its own.
Taking good care of your business’s credit history can put you in a good position to secure funding later down the line. But just like when we were all first starting out, many business owners run into the conundrum: how do you establish credit history without a credit history?
The truth is, most lenders are reluctant to lend to anyone without a proven credit history, and the same thing goes for businesses without any credit history.
So how do you secure a loan?
There are a few options, but first, it’s important to understand the relationship between your business and personal credit.
Is business credit and personal credit the same?
First, you should know that if you’re doing business under a registered entity, your business and personal credit are separate, each with their own scores and their own histories. However, these two reports paint the picture overall of your creditworthiness. As a business owner, this can have an impact on both your personal and professional life.
Can you get a business loan with bad credit?
Business loans and credit cards for businesses without an established credit history have to be what’s known as personally guaranteed. This means that even if the business fails or goes bankrupt, the borrower is still personally responsible for repaying the funds. One of the first things a lender will do when lending to a business owner is place a hard inquiry on their personal credit.
As such, creditworthiness for a new business is typically weighed heavily against the business owner’s personal credit history, or whoever is responsible for guaranteeing the credit. Poor personal credit history could put you in a position of only being eligible for small lines of credit with high interest rates.
How can you build credit for a business?
The best thing you can do to put yourself in a good position for capital access is to start establishing a credit history for your business. Here’s how to get a paper trail started so that banks will lend to you - see the 5 steps below.
Note: If you need help with these steps, let us know! Our team of experts is here to guide you through the process.
1. Choose to do business with companies who report to credit bureaus
This falls right under the chicken and the egg conundrum, but the reality is that even a small, high-interest line of credit can be great for your business credit history if managed properly. Lenders and credit card companies report on on-time payments on behalf of your business, and can help you establish a credit score for your business.
2. Get your house in order
There’s something to be said for appearances, particularly when it comes to small business lending. Having a professional and polished online presence can show banks that you mean business, and tidy books and well-thought out business plans are even better. Plan to have these things in place before you make your case to your bank.
3. Establish a paper trail
If you haven’t already set up dedicated business accounts, now’s the time. You’ll need an EIN number to set those accounts up, so make sure you’re registered your business, established a name for your entity, and received your EIN prior to starting the process.
4. Request a DUNS number
Dun and Bradstreet is the credit reporting agency that monitors the credit of businesses. To start establishing your business’s credit, you’ll need to first see if your business has a DUNS number.
If you try to look up your business’s DUNS number and nothing comes up, then you can request one for free.
5. Be a good steward of your debts
This goes without saying, but just like you would for your personal credit, make sure that you’re taking care of your business debt responsibly. Don’t overextend yourself, and always make your payments on time.
Do business credit cards affect personal credit?
While personal credit history can affect a borrower’s ability to qualify for credit, as long as business debts are in good standing, they don’t show up on the business owner’s personal credit. In some cases, business credit card issuers will report to personal agencies, but this is on a case by case basis.
Still need help getting funding?
Here at Skip, we specialize in helping bootstrapped small business owners get access to the funding they need. There are a plethora of loan programs offered by the SBA that are designed to be accessible to the average borrower. Our team can help you decide which program is best for you -- you can use this link to book a call with us!
There are also countless small business grant programs that award money to business owners who show promise. The best part? Grant money never has to be paid back.
Check out our blog for more information on SBA lending programs and other funding opportunities for small business owners, and remember that if you need 1-1 assistance, we're here to help!