The Conversation
If you're starting a business from scratch, you might be surprised to learn you'll also begin with zero business credit, regardless of how great your own credit may be. Because while your personal credit may be so high it would make even the Fair Isaacs Corporation blush, you don't have a record of paying off business services and expenses on time and in full. And that means you won't qualify—yet—for a business loan or credit from business vendors.
"You can't build credit for your business until you actually start it," explains Michelle Dunn, business adviser and author of The Guide to Getting Paid: Weed Out Bad Paying Customers, Collect on Past Due Balances, and Avoid Bad Debt. So how can you build credit while starting a business—presumably, a business that needs funding to get off the ground? We've got the inside scoop.
Get your personal credit score as high as possible.
"Unless you are a big business grossing millions of dollars, business credit and personal credit are the same thing," says Craig Smalley, financial adviser and managing partner of CWSEAPA. "There is no bank—or anything else—that is going to give a small business credit without the owners personally guaranteeing the debts." And you can't back a debt with bad credit.
Building positive and high credit is a cocktail of paying debts on time, maintaining a low debt to high credit ratio, periodically increasing your available credit, and checking your credit report for errors that could stunt your score's growth. Luckily, "women's typically have higher credit scores than men," says Smalley, "so they don't encounter too many problems when seeking credit." With a high personal credit score, if you have to take out a loan to get your business off the ground, you'll be in a position to do so, he says.
Start establishing bills in your business' name as soon as possible.
"When you are first starting your business you won't have any credit, so it is important to build some credit in your business name," explains Dunn. You can start building it as soon as you've registered your business name with your state and you've opened a business checking account. Deposit enough money into the account to get you started—most banks want to see at least $1,500 when you open an account—then sign up for internet, phone, electric, payroll, and accounting services in your business' name, to be paid from your business checking account. "All of these things will reflect on your business credit report as you open the accounts, get billed, and make payments," says Dunn.
Be careful to pay for business expenses with your business checking account or business credit card only. "You can mess up building business credit if you use a personal credit card for a business purchase or buy something using your name rather than your business name," Dunn says. "If you do something like this, those transactions may appear on your personal report when they should be under the business report. It is very important to be aware of this and try to keep everything separate in order to keep personal information on the personal report and business information on the business report."
As your vendors to extend credit to your business.
"You can do this by filling out a credit application and having vendors check your credit," explains Dunn. "They will see you are new and don't have any credit or very little—but they may still offer you some type of payment options." Be creative but professional in asking vendors to take the chance. "You can offer to pay for an order before ordering a subsequent order, for example, so that you only ever owe for one order at a time," suggests Dunn.
If you get credit from vendors and pay on time and in full, you're building credit with each vendor, one payment at a time. They'll hopefully reward you with more credit, but "if they don't offer you more credit, you can just ask them," Dunn says. "The biggest problem I see with women in relation to their business credit is that they wait for someone to offer them credit rather than asking for it. Ask for credit from your vendors—if they say no, offer a solution, such as the pay order-to-order solution." As you build your credit with vendors, your activity will show up on your business credit report. "So, if a vendor checks your credit again, they'll see more activity," Dunn explains. They call also call your bank for a record of on-time payments or bounced checks, she says.
Keep an eye on your credit.
Just as you periodically check your personal credit report, you need to scan your business credit for errors and updated activity. "The sooner you find an error and work on getting it fixed, the easier and less painful that will be," says Dunn. "The longer you wait to correct something, the harder it is to correct, which can be stressful and frustrating. So avoid that by keeping an eye on your business credit and taking an active role by having steps you want to take to build or improve it."
And in addition to monitoring your credit report, keep up-to-date on what business credit can do for you. "Women need to educate themselves on what they want to do about their business credit, and what they can do," Dunn says, suggesting keeping abreast of new credit opportunities that may arise. "Knowledge is power. If you know what steps you can take to build your credit, you can take them. If you don't really know what to do, it won't happen."