Can you establish good business credit if you have bad personal credit? The answer is yes…but with a few caveats.

Business credit reports and personal credit reports are generally completely separate databases for legal reasons. However, there are some exceptions in terms of how independent that information may be:

• If you are operating as a sole proprietor or Limited Liability Company, it is difficult to separate your personal and business credit. A corporation is a much better structure to build a completely independent business credit report.

• Experian sells a credit score that is a combination of the business owner’s personal credit history and the businesses’ credit history.

In the early years of a business, the owner will almost certainly be required to personally guarantee loans. However, as you establish a strong business credit rating for your enterprise, you’ll have more leverage to negotiate for a loan without your personal guarantee.

A warning: some people try to use business credit file to repeat bad credit habits.

“I’ve seen people who ruined their own credit go out and start a business, enlist the help of people with good personal credit to be executives in the company, and get major credit cards. They didn’t have a real product or service, and the objective was to just get credit. They would inevitably default on the corporate credit lines,” says Erik Salmon, Director of Business Credit Services for Innovative Business Services (IBS) and an experienced business credit coach. If that’s your intention in establishing a business credit rating, you’re better off taking some personal finance courses to learn how to manage your money.

If, however, you legitimately want to make a go of a business, have a solid plan, and are willing to do what has to be done to get it off the ground, then you should let a bad personal credit rating stop you. Building or rebuilding good credit – whether it’s personal credit or business credit – is a process. Be patient as you work on both your personal and business credit. The results will be worth it.

Most businesses want to be able to borrow money when they need it, without the owners having to guarantee the loans personally. This means less risk to the owners. But wanting to get credit for your business and actually getting it can be two different things.

One company recently approached us because over the past two years they had created a successful business, with over twenty employees. But they couldn’t get a business loan because they hadn’t taken the time to build a business credit profile and didn’t know where to start.

You may have seen marketing hype about how a business credit profile can overcome a bad personal credit file. In most cases, however, it’s important that small businesses have both good business credit, as well as solid personal credit on the part of the owners. This is especially true in the current environment where investors and venture capitalists aren’t handing money out to just anyone who can breathe and has a business idea! Even established businesses will find it necessary in some cases to provide the business owner’s personal guarantees on some loans or credit cards.
Building business credit is completely different from building personal credit, though your personal credit may be linked in some ways. For example, credit reporting giant Experian sells a business credit score that is based on both the risk of the business and the personal credit of the owner of the company.

In addition, you don’t have the same credit protection laws with business credit that you do with personal credit. So you want to make sure you start out on the right foot, or it can be difficult to make corrections.

The key to properly establishing business credit is twofold:

1. Set up the proper business structure and take basic steps to ensure your business appears “real” and stable to the business credit bureaus. That means getting the proper occupational licenses, and a phone number that is listed with directory assistance in the businesses’ name, among other things. Your business will generally need some form of corporate structure to effectively build a business credit rating.
2. Borrow or buy products and services from companies that will report your credit history to the major business credit reporting agencies such as Dunn & Bradstreet and Experian.  Unlike personal credit ratings, where you can have a small income yet get a top FICO credit score, the best business credit scores are reserved for large stable businesses, those with several million dollars in sales a year and 25–50 or more employees.

But don’t let that stop you! By taking a few careful steps, you can start small and still build a decent business credit rating to get you the borrowing power your venture needs.

A few warnings:

1. Don’t try to “buy” good credit! Some companies will offer to “sell” trade references for a large sum of money. This is a rip off and if the credit reporting agencies find out, they will purge those references.
2. Don’t spend large sums of money on a shelf corporation from a company that “guarantees” you will be able to use it to get loans. More often than not, the company won’t have the kind of credit rating you’ll need to be successful.
3. Don’t try to get business credit as a substitute for bad personal credit. If you have damaged personal credit, work on rebuilding it while you’re building business credit.

Entrepreneurs are usually hard-working, creative and willing to get the job done. Fortunately, those are the same qualities that will help you through the process of building strong business credit. Get started now!

If you own your own business, do you know what is in your business credit report? Do you know how important your business credit report is? When you choose to open your own business, whatever it may be, and do business with another company, the first thing they look at if you are an established business is your business credit report.

Your business credit report contains all of the information that is needed to determine if you are a good candidate to do business with, or if you are a risk. An individual or company can look at your business credit report and determine if you are on time with loan and credit card payments, if there are any public judgments against you and how long you have been established. That same person or business will use that to determine if THEY want to do business with YOU.

For example, say you are a small hometown construction company and you need supplies. You decide to go to the local hardware store and open an account, not only for the convenience but also so you aren’t worrying about how to pay for the supplies. The first thing that hardware store is going to do is to pull your business credit report.  Could you get an account with them if you have a bad business credit report? Not likely.

Another example with the same small hometown construction company would be this; you have been recommended to someone by a past customer, but this new customer knows nothing of you.  Given your permission, they pull a business credit report on you and it shows that you several judgments against you for sloppy work. Would you get their business?  Not if they are smart.

Your business credit report is a very important part of your company and how you do your business.  Make sure that you keep all of your accounts paid up and on time and that you do quality work for whomever your customers may be to ensure that your business credit report reflects who you really are.