How to Establish Business Credit
Even if you've formed a corporation or LLC, banks may still want you to provide a personal guarantee for any loans they make to your business. If you want banks to ignore your personal credit profile and not request a personal guarantee, you'll need to establish a solid business credit profile. Here's what you need to do.
Understanding Business vs. Personal Credit
Even if you're a sole proprietor, your business credit history is almost entirely separate from your personal credit history. The overall considerations are mostly the same -- on-time payments, length of credit history, etc. -- but you have two sets of credit reports and credit scores.
Your personal loans and credit cards report to your consumer credit report. Your business loans and credit cards report to your business credit report. If you've never had a business loan or credit card, you have no business credit no matter how strong your personal credit history is.
Organizing Your Business
Before you can start building your business credit profile, you need to formally establish your business. If you have a corporation, LLC, fictitious name or other business type, you'll need to properly register it with the state. Banks will often request proof before issuing business credit.
You'll also need an EIN. This is basically a Social Security number for a business and helps make sure everything gets tied to the right credit report.
Some banks also insist that you use a business bank account to make payments and will not accept your application if you only have a personal checking account.
Establishing Your Credit Profile
Once your business is formally established, building your business credit is much like building consumer credit. You'll want to start out with a small credit card or loan with easy approval standards.
If you start with a credit card, be sure to make a few charges each month and pay in full when you get the statement each month. If you start with a loan, simply make your payments as scheduled.
Once you've established a steady payment history, you'll be able to be approved for credit cards with higher limits and loans with better terms.
What About Accounts Payable and Trade Lines?
Accounts payable and trade lines are technically credit, but they may not help you build your business credit profile. Many companies simply don't go through the trouble of routinely reporting them, especially for smaller amounts on fast turnaround times. However, it's still a good idea to ask if they will report, because this can help build your credit.
You should also know that some suppliers who don't report your positive payment history may report if you pay late, get sent to collections or are taken to court. This will, of course, damage your business credit rating, especially if you don't have a reported positive payment history.
What Else Do I Need to Do?
Having good credit is only part of what it takes to get a loan. As with personal loans, you'll also need to prove that your business has a solid income stream to repay the loan. Banks rarely make loans to speculative ventures that don't have established cash flows.
The bank will want to see well-organized financial statements that clearly demonstrate that your business has enough income to survive on its own. If you're thinking about applying for a business loan, contact us for a consultation about how we can help you prepare your application package.