How To Build Business Credit Without Using Personal Credit
If you want to build business credit without using personal credit, you have to totally establish your business as separate from yourself. Then, start applying for business tradelines with lenient guidelines.
On-time payments from many business tradelines will establish your business credit as quickly as possible.
Here’s a step-by-step guide on how to do that.
Step 1 – Establish Your Business’s Identity
To build business credit without using your personal credit, you should separate the two identities as much as possible. Start by giving your company a name, address, and phone number distinct from your personal information.
Even if you don’t have an office or separate place of work, there are several ways to get an address just for your company. For example, you can reserve a P.O. box, register for a virtual mailbox, or rent a business mailbox from the United Parcel Service (UPS).
Fortunately, similar services also exist for getting a separate business phone number. One of the best free options is Google Voice, which gives you access to an additional number with calling and text messaging capabilities.
Step 2 – Establish a Business Legal Entity
After you’ve laid the groundwork for your business’s identity, assign it a legal structure that establishes it as an independent entity. Generally, that means turning it into a corporation or a limited liability company (LLC).
Both structures turn your company into an entity that’s legally separate from you, the small business owner. In addition, it provides you with liability protection, making it harder for a lender to hold you personally liable for the company’s debts.
Try to stay away from filing as a sole proprietorship or a partnership if you’re in business with another person. Default options are convenient because they don’t require any paperwork but don’t qualify as separate entities or provide liability protection.
In addition, many creditors are reluctant to extend credit to sole proprietorships and partnerships, especially without a personal credit check or personal guarantee. That makes it much harder to build business credit without using your personal credit.
However, your legal entity structure also significantly impacts your tax situation, so don’t rush the decision. It’s best to consult a Certified Public Accountant (CPA) and get their advice on the best choice for your business.
Step 3 – Get an EIN for Your Business
Once you’ve formed a separate legal entity, you must register your business with the federal government. To do so, apply for an Employer Identification Number (EIN) with the Internal Revenue Service (IRS).
An EIN is like your company's Social Security Number (SSN). You'll use it when filing your taxes, opening a business bank account, and applying for credit in your business's name.
Fortunately, the IRS has made the EIN digital application free and easy. Just provide basic information about your company, like its name, address, and phone number, and you’ll receive an EIN upon completion.
However, if you ever change your business’s legal structure, you must request a new EIN. For example, if you received one as a sole proprietor and later incorporated, you must apply for another EIN.
Step 4 – Get a Business Bank Account
Opening a dedicated business bank account is another critical step in establishing your business as its own entity. Maintaining separation between the company’s funds and your own creates a paper trail that reinforces the distinction between you.
In fact, the commingling of personal and business funds within a single bank account can undermine the liability protection corporations and LLCs provide. If you make that mistake, creditors may be able to “pierce the corporate veil” and come after your assets.
Also Read: How to Build Business Credit With Bad Personal Credit
In addition, having a business bank account is sometimes directly required in the business credit building process. For example, some creditors ask that you have a business bank account to accept your small business loan funds.
Make sure that you select a legitimate business bank account in your company’s name, not just a separate personal checking account. Don’t be afraid to shop around for a while, as the terms and customer service can vary significantly between them.
Step 5 – Apply for a DUNS Number
Dun & Bradstreet (D&B) is one of the primary business credit bureaus, along with Experian Business and Equifax Business. However, unlike its peers, D&B requires you to register with it before it'll start building a business credit report for you.
To initiate that process, you must apply for a DUNS number. Like an EIN, it’s a unique, nine-digit number that identifies your business.
It’s mainly for tracking you in the D&B system, but you may occasionally need it in other situations, such as when applying for a government contract.
To get a DUNS number, you must complete an online form similar to the EIN application. Once again, you’ll need to provide basic information about your company, such as its legal name, address, and phone number.
The application won’t cost you anything unless you want to expedite the process. It can take up to 30 business days to receive your DUNS number by default, but you can pay to reduce that to just eight business days.
Step 6 – Open Business Tradelines
At this point, you should be ready to start building business credit for your company. That means you’ll need to open credit accounts in your business’s name and have them reported to the business credit bureaus.
A business credit account is known as a tradeline. There are two types available:
- Vendor tradelines: These are credit accounts you receive from other businesses you work with, such as your suppliers. Also known as trade credit, vendor tradelines are typically just extended repayment terms, such as net 30 or net 60 accounts.
- Financial tradelines: These are the accounts you'd get from traditional financial institutions and online lenders. For example, a business credit card or small business loan would qualify as financial tradelines.
Generally, you’ll need to build up your business credit with vendor accounts before you can qualify for financial tradelines. To avoid involving your personal credit, target businesses that don’t require a personal credit check or personal guarantee.
One of the best options for business owners is to subscribe to the eCredable Business Lift program. Our service lets you turn your ongoing expenses into tradelines, including your subscription payment.
Not only will we report your continuing payments, but we can also share up to 24 months of past payments. As a result, you can establish years of business credit history overy quickly. Give it a try today!
Step 7 – Make Early Payments and Keep Balances Low
Opening up tradelines in your business’s name is only half the battle. To build a good credit score for your business, you’ll also need to use your accounts responsibly long enough to impress prospective creditors and satisfy scoring algorithms.
Generally, the most impactful thing you can do to show that you can manage your credit well is to make your payments on time. In fact, the D&B PAYDEX score’s only criteria is how timely your credit payments have been for the last two years. In fact, you can only earn the best PAYDEX score is your payments are early!
Another beneficial practice is to keep your credit utilization low. Generally, that means keeping the balances on your credit cards and other revolving credit lines below 30% of your credit limit.
Not only does that lessen their impact on your cash flow and make it easier to keep up with your payments, but it also demonstrates to creditors that you’re not relying too heavily on your tradelines to make ends meet.
Also read: The Business Credit Bureaus That Most Heavily Impact Your Credit Score
Step 8 – Monitor Your Business Credit Reports Regularly
After you’ve opened a few tradelines that get reported to each business credit bureau you want to build credit with, check in with your business credit reports frequently. That will help you catch any potential issues before they become too troublesome.
In addition, monitoring your credit building progress means you’ll know when you’ve done enough to start applying for more advanced tradelines. If one of your reports or scores improves faster than the others, it can also help inform which lenders you target.
Generally, the most important ones to monitor are your D&B, Experian, and Equifax reports. Unfortunately, the Fair Credit Reporting Act (FCRA) doesn’t extend to businesses, so you’ll usually have to pay for access to them.
You can get a copy of each report from the issuing business credit reporting agency or a third-party business credit monitoring service like Nav.
How Are Personal Credit and Business Credit Different?
The personal credit and business credit systems function similarly in a fundamental sense. Credit bureaus gather information about you the same way and funnel that data through scoring algorithms to calculate your creditworthiness.
However, the similarities end there. Here are some of the most important differences between the two systems to be aware of:
- Rights and regulations: As mentioned previously, FCRA doesn’t apply to businesses, so they don’t have the rights consumers do. In addition to having to pay for copies of each credit report, you may find it more difficult to dispute information in them that you believe to be inaccurate.
- Role of credit bureaus: Not only do commercial credit bureaus gather information on businesses, but they also issue the most popular business credit scores. In contrast, consumer credit bureaus compile credit reports and let FICO and VantageScore provide the scoring algorithms.
- Variety of credit scores: Unlike personal credit, there’s no single most popular business credit score. There’s also more variation between business credit scores than consumer credit scores. Not only do they tend to use very different criteria, but they also have wildly different ranges.
Keep the differences between the two systems in mind while you build business credit, as they can help inform your strategic decisions.
How Long Does It Take To Establish Business Credit?
Generally, you can expect it to take six months to a few years to get your business credit where you want it to be. After all, you must open multiple business tradelines and demonstrate that you can manage them responsibly.
Securing the credit accounts you need is often time-consuming. You’ll only be able to qualify for so many at first, especially if you limit your efforts to vendors and creditors that won’t check for a poor personal credit score.
Creating a positive payment history takes even longer since you can typically only do so one month at a time, and you may need a year or two of timely payments on each credit line to establish respectable business credit scores.
This is one of the key advantages of eCredable Business Lift. The accounts that you link (or have manually verified) to be reported to business credit bureaus can include up to 24 months of payment history. This can significantly shorten the time required to build a business credit score!
Ultimately, building a good business credit score is a long-term game. Start as soon as possible so you’re ready when you need to apply for financing.
See our full answer on the question: How Long Does It Take to Build Business Credit?