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Tips for Building Business Credit

Creditworthiness is vital to maintaining a healthy business. From business loans to vendor relationships, how well you manage your finances as a consumer will play a role in your company’s growth potential. One way to maintain creditworthiness is not only paying attention to your consumer credit reports, but establishing a separate business report. Sandra Bernardo of Experian shares tips to build business credit.

What are the steps to establishing business credit?

a. Establish the business as a legal entity. For small businesses, that typically takes the form of a Limited Liability Corporation (LLC). Having a legally structured business is necessary to establish a business credit report.

b. Open a business credit account. A business account, such as a charge card or installment loan for capital investment, will then be reported to the business credit report. The account must be in the business’ name, and not the individual’s personal credit.

c. Pay the bill on time, and as agreed under contract. Just like personal credit, business credit histories show how the business manages its financial obligations. The most important thing to do is pay the debt on time and meet the payment terms of your vendors. Doing so will result in a strong business credit report over time.

Why is it important to have separate credit files (business vs. personal)?
It is not uncommon for small and micro-business owners to secure business financing with their personal credit history. Doing so makes them personally liable for the debt. Establishing an independent business credit history helps to ensure liability for business debts belong only to the business. With separate business credit, and a separate business credit history, financial challenges faced by the business won’t threaten the owner’s personal credit.

How can a business owner establish business credit as a sole proprietor?
If an account is reported as “commercial” it can be added to the business credit report, so an individual proprietor could have a business credit history if the lender reports a loan to them as a commercial loan. The key is that the lender has to report a commercial loan, not an individual loan.

Other than acquiring small business loans, what are some of the benefits of having good business credit?What are common mistakes entrepreneurs make when establishing business credit?
One of the most common mistakes is securing business debt with personal credit. It’s important to understand that in order to establish business credit, the account must be a business account in the business name. It cannot be a personal account used for business purposes.

The business must also be legally registered as a business entity, in most cases as an LLC. That may sound obvious but is often not done by small and micro-business owners.

Are the business and personal scores calculated using the same methods? What are some differences?
Personal credit scores and business credit scores are both used to help predict lending risk, but that’s where the similarity ends.

Personal credit scores use information from an individual’s credit report to calculate the score. Business credit scores use only the information from a business credit report.

Personal credit scores are not part of an individual’s credit report. They are a separate process, although they are delivered together, sometimes giving the misperception that the score is part of the credit report. Experian’s business credit report includes an Experian business credit score.

The scales of business credit scores also differ from those of personal credit scores. Experian’s business credit score has a range of 0-100. The higher the score the better. Consumer scores have a wide variety of ranges, the most common being roughly 350-850.

sandrabernardoSandra A. Bernardo is the manager of Public Relations and Consumer Education at Experian Consumer Services, a division of Experian. In her role, she manages publicity efforts and outreach campaigns to generate awareness and understanding about credit.

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