Do I have to restore my personal credit in order to establish business credit?
You don’t have to restore or repair your personal credit to establish business credit, but it definitely makes things easier. When you build corporate lines of credit with poor personal credit, you get poor quality credit lines, like we’ll discuss below.
When you apply for corporate credit, especially in the first two years, lenders will always ask for the social security number of the owners of a small business, for the purposes of running a credit check.
Once the credit is obtained, it will only report on your personal credit report if it goes into default. Otherwise, the account doesn’t show up on your credit records. Some people call this a loophole in the credit system. Really it makes sense.
When a new company starts building credit, it doesn’t have a credit history. Just like a teenager buying their first car, it needs a credit reference and cosigner. For your business, the credit reference is your personal credit score. THe cosigner is the personal guarantee you give.
To property build business credit, you must start with a proper business entity structure. You must have a legal entity that’s seperate from you as an individual, like a corporation or limited liability company (LLC).
If you’re a sole proprietor, you don’t have a seperate business legal entity. So even if you’ve been in business for years, you don’t have business credit. Surprisingly, many proper legal entities that have been in business for years may not have business credit either.
When building business credit, usually the business owner will be required to personally guarantee business loans that are offered by banks. In fact, when you’re looking for unsecured lines of credit for business, a personal guarantee is inevitable.
Once you establish and build your business credit, you may be able to obtain more loans without a personal guarantee. However, the most readily available sources of business credit will still ask for personal credit information and a guarantee.
However, there’s another kind of unsecured business credit line available. Some business credit lines are trade lines (credit extended by companies that have business to business products or services) are available without personal guarantees, but they are limited in credit limits and availability. Trade lines has to be used to purchase specific products or services, like office supplies.
When you have bad personal credit you can build good business credit, but your credit lines will be lines for borrowers with bad credit. Which means you’ll pay higher interest rate, have smaller lines available, and they will usually be these trade lines.
The bottom line? While you’re building your business credit trade lines, work on your personal credit, don’t ignore it. Having both a good personal credit score and a good business credit score will ensure that you get all of the financing you need for your small business.
The number one question this month at http://www.credit-millionaire.com/ask is
“How do I remove inquiries from my credit report?”
To answer this question, I first want to come back to the language in the Fair Credit Reporting Act which states that if the “completeness” or “accuracy” of any item is information is disputed, it must be verified removed within 30 days of receiving the notice to dispute the item.
So if a inquiry is legally yours, it must be either incomplete or inaccurate for it to be challenged.
Ok, so first thing is first. There are soft inquiries and hard inquiries. Soft inquiries are when companies request the name and address of people that fit into a certain profile. These are listed at the end of your credit report, usually with a note that they don’t affect your score. They don’t. Lenders also don’t see these inquiries. They are listed for your information only, and they don’t hurt you.
While we are on the topic, neither do your own inquiries to your report. Don’t worry about them.
Then, when you look at your report there are likely some inquiries that you don’t recognize at all. Challenge them with an “I don’t recall” letter. Something like, “I don’t recall applying for credit from this company, please remove it from my credit report.” If that doesn’t work, send a 45 day letter, which can be found in the letters appendix of the Credit Millionaire System manual. If they aren’t legally yours, they shouldn’t be on the account.
So let’s talk whether they are legally yours. As credit millionaires, many of you are applying for credit for your business. Unless your business has been in existence for years, your lender is going to look at your personal credit to make a decision about your business credit.
This is the worst kind of inquiry, because the credit you are eventually extended doesn’t appear on your personal credit report. Inquiry without corresponding loan equals lower score.
Incidentally inquiry with corresponding loan usually means higher score… but that’s an explanation for another post.
So, how do you remove those business inquiries from the account? Step 1: send a letter to the bureau saying that those credit inquiries were for your business, and are therefore not yours and should be removed. This simple act seems to work 30% of the time. Step 2: if you don’t hear from them in 30 days, write a stronger letter that says they should be removed or verified by showing you a signed credit application in your name. As good credit millionaires, you wouldn’t have signed the application as you, but only as “Your Name, Title”, clearly showing that you personally didn’t apply for credit.
Next, inquiries that are your personal ones, but are inaccurate. Perhaps the creditor name is incorrect. Maybe you applied for credit from one company, but the inquiry is from another. Interestingly, the strategy is the same as it is above for business credit, except the “reason” is inaccuracy.
Finally, inquiries that are your personal ones that are incomplete. This is the least likely reason you’ll be able to challenge the account. Some reasons why the inquiry might be incomplete is because it lacks the full name or address of the creditor. Lame, but if it’s the truth, you may be able to get the inquiry removed.
With a challenge like this, you’re really hoping that they credit bureau doesn’t verify the item within 30 days. Items not verified in 30 days must be removed. To prove the 30 day time period, many people advocate sending certified letters. It’s up to you, but I usually don’t send the first letter certified. Certified letters are responded to more quickly at the bureau level.
You can also challenge an inquiry with the lender that’s listed on your report. You can write that “My credit report shows a credit inquiry by your company and I do not recall authorizing an inquiry. I know you aren’t legal allowed to put an inquiry on my report unless I have authorized it. Please have this removed from my credit file and forward me the documentation that you have done so.”
If you try this step and the lender doesn’t respond, you can use that fact in your credit bureau challenge. “Please note that before contacting you about this error I sent a letter to the lender responsible for this unauthorized inquiry and asked them to remove the inquiry from my report and cease this illegal activity. I have not heard a response from them within XX days.”
In all cases of inquiry disputes, it’s important to remember that the effect inquiries has on your credit report is very minimal. Only spend your time with them if they are the last thing you’re trying to challenge. Within 6 months the impact of the inquiry is quite minimal to your score (although particular lenders may care about the number), in just 2 years the inquiries are gone from your records.
Here’s a great question from a reader..
How can “BookWise” be described as a “Credit Millionaire” business?
Paulie responded so well I decided to place his response in this blog. Here it is.
AHAH!
Great question!
Wow, maybe I’ll turn this into a blog post.
2-reasons.
When you’re getting lines of credit for your business,
One of the key factors that keep most people from getting
The kind of money that they want is sufficient SALES!This is especially harmful if you’re in real estate and you
Do buy and hold.But for example, Donna and I do over $50,000 a month in
Sales together with Bookwise.Because of those new sales we were able to get another
$200,000 line of credit!But, …and this is key… we didn’t PERSONALLY generate
$30K and $20K in monthly sales, our team did much of it
For us…and we working with our team.So it has to do with the fact that over time you get
Sales volume you didn’t have to make!Second, it has to do with the key question of Credit Millionaire.
You know most people would not be better off
If they could borrow 7-figure loans!Why?
Because they don’t have the right learning. They don’t
Know how to invest the money to make more than the
Cost of funds.Because Bookwise is about learning (and specifically)
Financial coaching with Bob Allen, it gives people more
Ways to acquire that special knowledge to make borrowing
Smart.!Great question!
Paulie Sabol!
Did you enroll already? Or were these questions to help
You decide? If I can help you, shoot me a ring at
219-406-4696otherwise, visit BookWise
