Before you charge another business expense on your personal credit, let’s look at why and how you should build separate business credit.
If you’re thinking about building business credit that’s separate from your personal credit, congratulations! It’s nearly impossible to scale a business using your personal finances alone, so taking this step shows you’re serious about growing something special.
When starting out, most business owners are forced to rely on their personal credit profile because they simply don’t have a business credit history. But as you grow, you can expect to use credit at ten times the rate of a consumer. Eventually, your personal credit won’t be enough.
So, before you charge another business expense on your personal credit, let’s look more at why (and how) you should build a separate business credit profile.
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Access the credit you need
According to the Small Business Administration, delayed or insufficient financing is the second-most common reason for business failure. You can keep yourself out of this camp by building and using a credit profile for your business.
That’s because a business can typically access 10 to 100 times greater credit capacity compared to personal credit, and at more favorable interest rates.
Yet, many business owners are either neglecting or unaware they have business credit. A Wall Street Journal survey showed that just 33% of business owners are even checking their business credit profiles.
If you ignore your business credit and rely on personal funds alone you run the risk of:
- Having insufficient financing to take advantage of growth opportunities or to smooth out cash flow during lean times.
- Maxing out your personal credit, which hurts your credit scores and puts your assets at risk.
The typical consumer gets one credit inquiry per year and has eleven open accounts on their reports. If you’re using your personal credit for your business, you can expect to double both these numbers, which will seriously hurt your personal scores.
How to build business credit
Just as you have personal credit scores, so too does your business. This separate business credit profile is maintained by bureaus like Experian, Equifax and Dun & Bradstreet. They generate your business reports by pulling data from public records and obtaining payment information via your business creditors. Simply put, these reports reflect your business’s ability to pay back debt.
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If you’re a newly minted business or have never taken steps to build out your business credit file, here’s how to get started:
1. Establish a legal business entity, such as an S-Corp or LLC. Discuss this with your tax advisor to determine what option makes most sense for your business and financial situation.
2. Create a business tax ID number. Also known as an Employer Identification Number (EIN); think of this as the social security number for your business. You can quickly apply on the IRS’s website.
3. Set up a business checking account. This will help you draw a clear line between business and personal expenses. Plus, it validates the legitimacy of your business. Lenders and creditors will take you more seriously if you have a separate business account. Keep it well funded and manage it carefully.
4. Apply for business credit accounts. To start, apply for a credit card with a business supplier you work with often, such as Staples, Home Depot, Lowe’s, etc. They are usually willing to establish a small credit line for your business without using your personal credit information. Always pay the bills on time.
Important: When setting these accounts up (or if you already have existing commercial credit accounts), verify they report your payment history to the business bureaus. This information is sent in voluntarily. And if they don’t, your good payment history will go to waste.
Over time, as you build a strong payment history, your credit standing will improve and business lenders and creditors will be more willing to bet on you. That’s when things get fun.
You’ll gain access to better financing and commercial relationships that give you the freedom to focus on what matter most—growing your business the way you want.