Starting a new business is exciting, but it’s also stressful. Some businesses can grow out of a hobby (reselling thrifted finds), and, if there is a desire for expansion, there may be a need for new business owners to learn how to build business credit.

Both personal credit and business credit help establish creditworthiness and this aids in securing better interest rates for loans and lines of credit. Personal credit is different from business credit, although your personal credit may influence business loan terms, too (if you are securing a business loan personally).

When you’re a new entrepreneur, here’s how to build business credit and establish your company in the process:

Sole proprietorships typically mean that the business and individual are not legally separate entities. However, an LLC establishes a business that is separate from the individual. Starting an LLC can show that the business is more than just a side gig or hobby; however, when starting an LLC, you should separate personal accounts from business finances.

Before you establish an LLC or other legal business entity, meet with a qualified business attorney who can help you in the process. You should also consult with an accountant who can help you understand how to keep your business accounts separate (by opening a business checking account) and explain your financial obligations related to taxes and other filings and financial responsibilities.

Once you’ve established a legal business entity with your state and opened up a business banking account, you may consider establishing business credit by opening a business credit card. Think about establishing a credit account with the financial institution where you open your business checking account. A preexisting banking relationship could provide you with better card options.

How to Build Business Credit

When you plan to start a business, you need to understand how to build business credit.

A good business credit score will help you prove creditworthiness when future growth endeavors may require loans or financing. How do I build up business credit without using my personal credit?

If you’re applying for a business line of credit or a major loan, the bank or lending institution may require you to guarantee the loan personally. This means that your personal credit may come into play.

If you’re concerned about how your personal credit may affect applications for business loans, credit cards, or other financial dealings, talk to your bank or credit union. Financial specialists who handle business loans and lines of credit will be the best resource and can answer any questions or concerns.

How do you start a business credit?

Depending on your industry, another way to establish business credit is by establishing relationships with vendors. Maybe you need to purchase tools for your business or buy products. Vendors may allow you to open an account for your business to place necessary orders.

Once you establish these relationships, you need to make timely payments to vendors. Good credit relies on prompt payments. Like personal credit, late payments will ding your credit score!

How long does it take to build good business credit?

Like personal credit, a good business credit score may take time to establish. And, over time, that score can go up or down, depending on your financial management and business history.

Credit scores or creditworthiness are based on factors that may differ from those affecting personal credit. Experian reports that any credit actions (like collections, judgments, etc.), delayed payments, lots of credit inquiries, business history (how long the company has been in business), and other factors all could negatively impact your business credit score.

Does personal credit affect business credit?

Again, depending on the circumstances, your personal credit could impact business loans and applications.

Talk to a business attorney and a CPA to discuss the legal and financial separation of your business from your personal accounts and dealings. According to Dun & Bradstreet, “if you are a sole proprietor, your personal credit may have a greater impact on your business.”  

Other Considerations

When starting your own business and establishing a legal business entity, you also need to know about professional licenses that may be needed to operate. Do not begin operation until all professional licenses are secured!

So what business licenses will you need? That depends on your industry and local, regional, or state laws. Again, this is why it is so important to meet with an attorney before establishing your business. The Small Business Administration (SBA) also provides information related to licenses.

Business insurance is also necessary to help protect your company against any liabilities and lawsuits. You may need comprehensive insurance, or you may be completely fine with a simple liability policy. Discuss your options with an insurance broker to see what coverage you may need. Your industry also could require more specialized coverage.

How to Protect Your Credit

Your business credit will allow your business to apply for additional loans or other financial credit. A glowing score will show vendors that you’re trustworthy, pay on time, and are a lower risk. Poor credit scores, though, may cause your business to have limited options when you need additional funding or credit options

Manage business credit responsibly. Pay on time and don’t apply for too many loans/accounts at once. If vendors constantly need to send your business to collections to obtain payments, the business’ credit will suffer. The longer your business is in operation, the more creditworthiness it may gain. A longstanding business is one that is well managed and, hopefully, profitable. Understand that operating a small business can be difficult; only about one-third of small businesses are still operating after 10 years. Make a financial plan early, don’t overextend business finances, and always have a good team of financial and legal advisors to help you. While survival may be tough for small businesses, many do survive…and thrive!