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.
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