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November 11, 2018

Build Business Credit with a Bad Credit Score

Entrepreneurs may have poor credit for many reasons, including college debt, bankruptcy, or divorce–just to name a few. For many startup businesses, this can make it difficult to build business credit. The good news is, there’s a way to build business credit despite a lower personal credit score, and you don’t need to wait for your personal finances to improve before you get started.

Differentiating Between Personal and Business Credit

Some new business owners are unclear about the difference between these two credit ratings. Surprisingly, they are not linked and actually contain different information. When you are a sole proprietor without an established business, lenders will check your personal credit to determine your debt status.

Unfortunately, not everyone has a good personal credit score. This can hinder business owners by limiting their access to many affordable financial solutions. As an entrepreneur, building and maintaining your business credit should be a top priority, whether or not you plan on taking out a loan soon. Here’s how to get started.

1. Establish Your Business

Lenders look for indicators that a borrower’s business is profitable and viable. That’s why it is important to make sure that your organization looks like a legitimate business. One way to do this is by forming a Limited Liability Company (LLC). This shields your personal assets from the business and removes you as a sole proprietor, separating your company from your bad credit score.

You should also get an Employer Identification Number (EIN) from the Internal Revenue Service, as well as a Data Universal Numbering System (DUNS) business profile number from Dun & Bradstreet. Make sure you have a business plan and appropriate licenses to operate in your city. The business should also have an official physical address and phone line.

2. Get a Secured Business Credit Card

Now that you have established your business and separated it from your poor credit score, you are eligible to get a business credit card. Obtaining a secured credit card is a great way to build business credit. Just like a consumer card, the bank provides a spending limit with a minimum amount to be paid each month.

Using a business account is convenient, and it makes it easier to monitor the expenditures of the company. The card will have a daily withdrawal limit, as well as an annual fee. It can also be easier to negotiate a higher limit than it would be with a personal card. Just like with a personal credit card, the more you use your company credit card responsibly, the better your business credit score will be.

3. Trade Financing

Another way to develop business credit is through trade financing: a type of business-to-business credit line with a short financing term ranging between 15-30 days. Essentially, a trade line from a supplier allows you to pay the account balance several weeks after delivery of the inventory. Vendors can report transactions to credit reporting bureaus, which can help you establish a good payment record with suppliers and improve cash flow. These reports might include things like available balance, amount due, the terms of the trade line, and recent activities–just to name a few.

Keep in mind, however, that not all suppliers report payment activity, as they are not required to. This means that even if you are paying on time, you might not be building your business credit. You should consider dealing only with suppliers that report to the reporting bureaus, as this will build or improve upon your business credit rating.

4. Monitor Business Credit Report

Credit is essential if you want to grow your business, so it is a good idea to make sure that you maintain the creditworthiness of your company.

Check the credit report regularly.

Reporting bureaus collect information from a variety of sources and then use that information to determine your business credit score. Always make sure all the information in the report is accurate. If there are any errors or mistakes found in the report, contact the respective reporting bureau right away.

5. Pay Bills on Time

Payment history with lenders, credit card companies, and suppliers play an important role in building business credit. Late payments show up in reports and can damage your rating. Experts suggest paying earlier if you want to increase your score. You’ll get a score above 80 in the Paydex by Dun & Bradstreet if you pay bills before their due date. Paying your debts early also shows that you are a sensible borrower.

Another helpful tip: when using a credit card, make sure that you don’t use more than 70 percent of the available funds.

6. Work to Improve Your Personal Credit Score

A good business rating can be helpful, but it is not always enough–especially when applying for larger loans. Business owners should always be working to improve their personal credit ratings. Not only does this prevent higher insurance and interest rates, but it is also necessary for the long-term growth of the company because it will allow you to gain access to better financial tools offered by banks and other creditors. Most financial institutions don’t deal with entrepreneurs with a score lower than 640. There are even some banks that don’t entertain people with a score of less than 680.

There are many reasons why your credit can be low. However, that does not have to stop you from expanding your business. As soon as you launch your company, start building your business credit. Regardless of your long-term plans for the company, building your credit will be beneficial to you in the long run, allowing for a better chance of achieving financial success.

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