How to build business credit when you have bad personal credit

On top of having a solid business plan and steady cash flow, credit history plays a big role in how you scale and grow your business.

“Business credit is what lenders will evaluate to determine your creditworthiness,” says Rochelle Burnside, business loans expert at BestCompany. “It can determine whether you’re eligible for financing, and it demonstrates your financial responsibility to potential investors, vendors and business partners.”

Establishing business credit from scratch often means using personal credit as a jumping-off point. But what if you have poor personal credit? The following tips can help with building business credit when your personal credit history is less than perfect.

How to build business credit when you have bad personal credit

• Establish your EIN
• Register with Dun & Bradstreet
• Apply for trade lines with your vendors
• Apply for a business credit card
• Consider a secured business card
• Try a small working capital loan
• Check your business credit reports regularly

Personal credit vs. business credit: What’s the difference?

Personal credit and business credit both measure how you manage your financial obligations but in different ways.

For example, FICO personal credit scores are calculated based on five key factors:

• Payment history: 35% of your score
• Credit utilization: 30% of your score
• Length of credit history: 15% of your score
• Credit mix: 10% of your score
• New credit: 10% of your score

Business credit takes a different approach.

• It focuses on factors such as time in business, number of employees, public filings and payment history.
• Business credit information is primarily collected by four main reporting agencies: Dun & Bradstreet, Equifax, Experian and FICO.
• Generally, payment history carries the most weight for business credit score calculations.

“Business credit scores rely even more heavily on payment history than consumer credit scores,” says Ted Rossman, senior industry analyst at CreditCards.com.

Rossman says account longevity is important, too, because in many respects, business credit scores are more straightforward than consumer scores.

“The longer you’ve been in business and the more you’ve paid your creditors on time, the better,” says Rossman.

And although there are rules about who can get personal credit reports, anyone can have access to business credit profiles.

This means potential lenders and even your customers can view a copy of your business credit history. Aside from borrowing, that’s another reason to establish good credit since customers can readily access your information.

Is business credit based on personal credit?

Even though business and personal credit are separate, business owners’ personal credit scores can still have a big impact on business lending decisions, especially when a business is just starting out, according to Rossman.

“For companies with small ownership and limited credit history, they may be asked to sign a personal guarantee for loans or financing,” says Jameson Murphy, senior sales executive at United States Equity Funding, LLC.

A personal guarantee means you agree to be personally liable for any debts your business takes on. That means if you default on a business loan or line of credit, the delinquency could show up on your personal credit history.

Your personal credit and business credit may also be intertwined if you operate your business as a sole proprietor. For financial purposes, you and the business are treated as one and the same so lenders may lean more heavily on your personal credit when applying for business loans.

How to build business credit without using personal credit

If you want to establish and build business credit without relying on personal credit, there are a few things you can do to get started.

First, you need to obtain an employer identification number (EIN) and open a business credit file with the major credit reporting agencies, says Burnside.

“An EIN is the identification number that allows you to apply for loans and business credit cards,” she says. “It’s like a Social Security number for your business.”

There’s one thing to note about getting an EIN, however. You still have to provide the IRS with your Social Security number to get an EIN. The IRS doesn’t pull your credit history, so there’s no personal credit score impact.

Once you have an EIN, you can work on applying for business credit. While many business credit cards require a Social Security number to apply, there are a few that will let you apply with just an EIN. Typically, however, these options are limited to corporate cards.

If you have a smaller business, then you’ll need to consider other ways to build business credit without relying on personal credit. Setting up vendor trade lines could be the easiest way to do that.

Vendor trade lines are essentially lines of credit you establish with your vendors or suppliers. Murphy says having trade lines in good standing can help with establishing business credit if you regularly pay on time. The key is making sure that any vendors you work with report your account history to the major business credit bureaus so that you get credit for your good payment habits.

How to build business credit with bad personal credit

Bad personal credit can make paving the way to good business credit more challenging, but it’s not impossible. Here’s what the experts recommend doing to get on the path to better business credit:

• Establish your EIN if you haven’t yet. Having an EIN means you have an alternative option for applying for business credit. You can also use your EIN to open business checking and savings accounts.
• Register with Dun & Bradstreet. Dun & Bradstreet is one of the chief business credit reporting bureaus. To establish your business credit profile, you’ll need to apply for a free D-U-N-S number.
• Apply for trade lines with your vendors. If you have a newer business, vendor trade lines can be one of the most accessible credit options, even if you have poor personal credit. Just remember to ask whether your account will be reported to the business credit bureaus.
• Apply for a business credit card. A business credit card can help you begin building credit history since account activity can be reported to the business credit bureaus. Just keep in mind that getting approved may involve a personal credit check and a personal guarantee.
• Consider a secured business card. If bad personal credit keeps you from getting approved for traditional small business credit cards, a secured card may be the next best thing. Secured cards require a cash deposit that doubles as your credit line. Like vendor trade lines, make sure the card you’re opening reports to the business credit bureaus.
• Try a small working capital loan. Loans are another way to build business credit if you’re paying promptly each month. Many online business lenders offer working capital loans to business owners with poor credit. Keep in mind that you might end up with a higher interest rate.
• Check your business credit reports regularly. Your business credit report may be thin if you’re just starting out with building credit, but it’s worth reviewing anyway. Specifically, you want to make sure that your business credit accounts are being reported and that there are no errors that could negatively affect your credit rating.

Bottom line

Consider what you can do to improve your personal credit profile while building business credit history. Raising your personal score could help you qualify for better rates and loan terms on business financing.

The best ways to improve personal credit are paying on time and paying down your existing debt balances, says Burnside. And when it comes to applying for new credit, be conservative since each new inquiry can drop your personal credit score a few points.