How to Build Business Credit with Bad Personal Credit

Most American consumers understand the importance of their personal credit scores. But did you know that lenders often look at your personal credit when you apply for business financing?

Building business credit is important to secure business loans, credit cards, and supplier terms. If your personal credit score doesn’t make the grade, that may be difficult.

Here’s how to build business credit with bad personal credit.

Understanding Business Credit vs. Personal Credit

First things first: what’s the difference between business and personal credit?

Your personal credit score is linked to your Social Security Number and reflects your personal financial history.

Your business credit score works differently. It’s tied to your Employer Identification Number (EIN) and reflects your company’s financial history.

Despite these differences, both your business and personal credit scores will reflect your payment history, which is what lenders are primarily concerned about. Strong credit can give you better access to credit cards and loan programs and help you qualify for preferential interest rates.

Is Business Credit Tied to Personal Credit?

Your business credit remains completely separate from your personal credit history. That’s mainly because your business credit is tied to your company’s EIN, not your Social Security Number. If you own multiple businesses, you’ll have a separate credit report tied to each company.

Still, business owners often discover that their business and personal credit histories overlap in the eyes of lenders, especially if your business is a sole proprietorship or if it has a limited operating history. If your business credit record isn’t enough, your lender might ask for a personal guarantee for a business loan.

When Does a Business Loan Show Up on Your Personal Credit Report?

Since your business and personal credit reports are separate, a business loan will generally not appear on your personal credit report.

However, this doesn’t mean your personal credit history will be unaffected by a business loan.

How Does Personal Credit Impact Your Business?

Does personal credit affect business credit? Not directly, but it’s possible for low personal credit to affect your business credit in two ways.

Lenders Will Evaluate Personal Credit

If your business is relatively young, you won’t have had enough time to establish a business credit history. When you apply for credit, your lender or supplier will look into your personal credit history. If your personal credit score is low, it can be difficult to obtain business credit.

You Risk Repeating Mistakes

Your personal credit score is a reflection of your financial habits. If it’s on the low side, you have probably had some issues handling money. If you have made late payments, maxed out credit cards, or made other mistakes that harmed your personal credit, you may make the same mistakes in handling your business finances.

Your credit report and credit score tell potential creditors about your money habits, but the information in them is also important to you. If your credit isn’t good, you need to understand why and correct those mistakes before they creep into your business life.

The Importance of Separating Personal and Business Credit

⚠️ One of the most common mistakes business owners make is using personal assets to cover business expenses.

In the earliest days of your business, this can feel like a natural way to fund your business, but it’s important to separate personal and business credit as soon as possible. Here’s why.

• Protect Your Personal Assets – Using your personal credit to run a business can put you at risk. If you default on a loan or your business fails, your creditors can come after your personal assets to cover what you owe.
• Simplify Your Tax Situation – Intermingling personal and business finances can cause a major headache once tax season rolls around. Keeping your personal and business finances separate will make it easier to identify business-related deductions, which can save you money in the long term.
• Look More Professional – Using a personal check to pay for inventory or equipment sends a red flag to vendors and suppliers, hinting that your business is less than legitimate. Keeping your business and personal assets separate can give your company a professional appearance and help you build brand recognition.
• Build Business Credit – Perhaps most importantly, keeping your personal and business credit separate ensures that your business will develop a financial history of its own.

The more you treat your business as a separate financial entity, the more you’ll see your business credit score grow.

Why Business Credit Matters

Even if you have a perfect personal credit score, it’s still important to build business credit. Here are a few things you can do with a strong business credit score.

1. Gain Access to Business Loans and Credit Cards

Most business owners will require some type of funding to start, maintain, or scale their enterprises. Many small businesses struggle to secure the funding they need to cover expenses.

With a strong business credit score comes access to higher loan amounts or credit limits, both of which can be invaluable when purchasing large quantities of inventory or specialized equipment. Maintaining a strong business credit score will make getting the funding you need faster and easier.

2. Negotiate Better Contracts with Suppliers

Lenders aren’t the only ones who look at your business credit score. You can leverage it to secure better repayment terms with vendors and suppliers. In some cases, vendors may look at your business credit score as they determine whether they want to enter into a contractual agreement.

A strong business credit score will make you more competitive, giving you room to negotiate the best terms when relying on suppliers to provide you with supplies or equipment. Otherwise, you may find yourself bound to the terms your vendors set, limiting your options and locking you into high interest rates.

3. Protect Your Personal Credit Score

It bears repeating that business owners should work hard to keep their personal and business data finances separate. The more you use your personal credit to cover business expenses, the more you risk damage to your credit score through hard credit inquiries or opening multiple lines of credit in a short window.

How to Build Business Credit Without Personal Guarantees

Given the importance of business credit, it’s important to learn how to build business credit with bad personal credit.

Some lenders will extend business loans on a conditional basis, requiring you to sign a personal guarantee. A personal guarantee requires you to be responsible for some or all of the business debt should you default on your loan.

Personal guarantees offer lenders protection but can endanger your personal assets and affect your debt-to-income ratio. That could make it hard to get a mortgage or car loan.

Here are some basic steps to help you build business credit without the risk of a personal guarantee.

1. Obtain an EIN

Start by ensuring that your business has an employer identification number, or EIN. This number will function as your company’s primary identification number and can be used to apply for credit cards and open business checking or savings accounts.

2. Get Your DUNS Number

Business credit reports are generated by three major business credit bureaus: Equifax, Experian, and Dun & Bradstreet.

Dun & Bradstreet won’t automatically start tracking your financial data. You’ll need to register with the bureau to obtain a DUNS number, which will ensure that your record of on-time payments contributes to your business credit score.

3. Apply for a Business Credit Card

This step can be tricky if you have poor personal credit. But even if your options are limited, it helps to obtain a business credit card since your payment history will be reported to the major business credit bureaus.

4. Apply for Vendor Trade Lines

Some vendors offer “vendor trade lines,” a specialized type of credit that companies extend to newer business owners. 

This can be a great way to start building business credit, and it doesn’t necessarily demand a strong personal credit score. Just make sure to ask whether the vendor reports on-time payments to the major business credit bureaus so you can start building business credit.

5. Apply for a Secured Business Credit Card

Wondering how to get business credit cards with bad personal credit? Consider applying for a secured business credit card. 

This requires a cash deposit that will double as your credit limit, but that’s still less risky than signing a personal guarantee. Once you build your business credit, you may qualify for an unsecured business credit card option.

6. Apply for a Working Capital Loan

Working capital loans provide an influx of cash that can be used for day-to-day expenses. These loans tend to be smaller than other forms of business financing, making them more accessible to business owners with poor personal credit. 

As long as your lender reports your payments to the major credit bureaus, you can also use your loan repayments to help build your business credit.

7. Check for Errors on Your Business Credit Report

It can take as long as a year to develop a meaningful business credit score, but make sure you monitor your business credit from the start. Not only will you know exactly where you stand, but you can also weed out errors in your report that could drag your score down. 

Report errors to the credit bureau that issued the report immediately. It can take time to erase these errors, but having them corrected will guarantee that your score is accurate.

Bottom Line: Can I Start a Business with Bad Personal Credit?

Your credit score shouldn’t keep you from launching a successful business.

The tips outlined here show you how to build business credit even if your personal credit is subpar. Taking advantage of these options can empower you to succeed in the business world and give your company a distinct credit profile.