How Can You Build Credit with a Limited Credit History

Business credit, like personal credit, is something you build, protect, and cultivate over time. While banks and other loaning institutions will initially check your personal credit score, they’ll expect you to have some form of credit history after operating for longer than a year.

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But what happens if you don't have any personal credit? Is it still possible to get a business loan or other financial products that pertain to your business? Yes, with a little bit of work.

What’s the Difference Between Personal and Business Credit?

Both your personal and business credit scores monitor your financial obligations, but in different ways. For example, the 5 key factors for FICO’s personal credit scores include:

  • Payment History (35%)
  • Credit Utilization (30%)
  • Length of Credit History (15%)
  • Credit Mix (10%)
  • New Credit (10%)

Based on these metrics, we know that late payments represent a more significant decrease in your credit score than the number of credit accounts you possess. It stands to reason that a good payment history and credit utilization will benefit consumers, but what about businesses?

Business credit takes a slightly different approach to how it calculates credit scores:

  • Payment history, business age, employee amount, and public filings are important.
  • Dun & Bradstreet, Equifax, and Experian are the main business reporting agencies.
  • Payment history, like with personal credit, has the heaviest weight.

Business credit scores focus on longevity, so the sooner you obtain an employer identification number (EIN), the better. However, unless you can gain access to financial products, you won’t be able to establish any credit at all, business or otherwise.

Route 1: Build Personal Credit First

The easiest way to start earning business credit is by leveraging your personal credit. If you already have a high personal credit score, you’ll gain access to small business loans, business insurance premiums, a higher credit limit, and the ability to raise investor-backed funds.

However, if you have a limited personal credit history, you’ll have to begin your credit journey by opening credit cards, secured credit cards, or store credit cards. Alternatively, you could become an authorized user for a primary account holder, provided they have great credit.

If you’re not interested in building your personal credit, you can build your business credit first, but you may have to put both your personal and business credit score on the line.

Route 2: Build Business Credit First

Companies with small ownership and limited credit history typically have to sign a personal guarantee before obtaining a business credit card or other business financial products.

Although business and personal credit scores are separate, your defaulted business loan could show up on your personal credit history if your personal guarantee includes this clause. When you give a personal guarantee, you act as a co-signer to your debts if you default.

A sole proprietor is both a business and personal entity, meaning you’ll affect both your personal and business credit score if you default. Banks will often rely on personal credit scores for sole proprietors who may apply for business loans or use the better score out of the two.

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How to Build Business Credit with a Limited Credit History

Before doing anything else, you must establish your business entity, create one or more business banking accounts, and apply for an EIN. Depending on the nature of your business, you may want to borrow money from lenders who report your payments to the credit bureaus.

Keep Business and Personal Credit Separate

Now that you have the basics down, you can establish business credit. Remember that personal and business credit are separate, so what you do to increase your personal credit score may not affect your business score at all 3 credit bureaus.

Personal transactions, like rent and utilities, can appear on your business credit score if you use a business product to pay it off. However, you run the risk of mixing up your finances. Unless you work from home, avoid paying personal bills, or you’ll have a rough tax year.

Consider a Secured or Starter Credit Card

Since businesses can't apply for student credit cards, you should leave those financial products for your personal accounts. Whether they’re business or personal accounts, you can use secured credit cards to improve or fill out your credit history.

People who have declared bankruptcy have used secured credit cards to get their score out of the red in 2 years, but you may reach the coveted 700 credit score even faster. Start by putting $250-$1000 on a secured credit card, then do this step again 6 months and a year from now.

Use your business credit cards for all business purchases to improve your business credit score. You can do the same with your personal credit. You can apply for starter credit cards that offer cash back, lower interest rates, and other rewards when you improve your credit score.

Apply for a Working Capital Loan

A working capital loan helps finance a business’s everyday needs. If you can qualify, an SBA 7(a) loan is generally the best option for working capital. The 7(a) Loan Program is the Small Business Administration’s primary program for helping small businesses with financing. The SBA does not actually make direct loans; instead, it provides loan guarantees, promising the bank to pay back a certain percentage of your loan if you are unable to.

Pay All of Your Bills On Time

Having a few credit cards and a loan won’t be enough to build credit. You still need to make sure you pay all of your bills before the due date. Otherwise, you’ll earn interest and tank your credit score. Only take on as much debt as you can afford to avoid bankrupting your business.

At the same time, don’t neglect your personal credit under the misconception that business credit will save you. Banks like to look at both numbers before lending out financial products, whether you're a sole proprietor or LLC. Take a look at SmartBiz University® for more details.

WHAT YOU NEED TO KNOW: The SmartBiz® Small Business Blog and other related communications from SmartBiz Loans® are intended to provide general information on relevant topics for managing small businesses. Be aware that this is not a comprehensive analysis of the subject matter covered and is not intended to provide specific recommendations to you or your business with respect to the matters addressed. Please consult legal and financial processionals for further information.

About the Author

With a background working for major financial institutions, Rupert is now an advocate of the financial independence movement. A passionate speaker, Rupert believes in helping individuals and businesses achieve financial freedom, and is determined to bring his insights to the World.

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