Nothing valuable comes easy. That was my grandmother’s advice to me, anyway. Building business credit with poor personal credit would qualify as one of those valuable things Maw Maw talked about.
Read on and you’ll learn best practices when it comes to building business credit by
- Working with vendors to build business credit
- Using financial products specifically designed to help your business improve its credit
- How you can piggyback on someone else’s credit and use it for your business
Build business credit via vendors
Wrap your head around this: New suppliers and vendors provide one of the easiest ways to build business credit. Suppliers are generally a good place to start to improve your business credit score because they’re typically looking for new customers, as well.
With a vendor, credit can come in two forms:
- trade credit: When two firms do business together, it’s up to negotiation what the payment terms are going to be around a transaction. This is actually a form of credit I like to call preferential payment terms. For example, if you run a small hair salon and you’re buying beauty products from a supplier, that supplier can require you to pay for everything up front. Or, the supplier can ask you to pay in two weeks (net-15) or a month (net-30). There’s no real hard or fast rule. It’s worth having the discussion with your suppliers to explore how far they’re willing to go to give you a little payment cushion. Nav recommends signing up with Uline (shipping supplies) and Quill (office supplies), both which offer the option of net-30 terms.
- actual line of credit: Some suppliers will grant new customers a line of credit to help them finance purchases. The size of these lines of credit, which can run from tens of dollars to a couple thousand dollars, depends on the vendor. Grainger (industrial supplies) provides a credit line up to $1000 when you sign up. As you pay back your line of credit on time, these payments should be reported back to the credit rating agencies like D&B and count positively towards your business credit score.
Working with suppliers, especially for things your business needs to buy anyways, is a great place to start to build your business’ credit, even if your personal credit isn’t good.
Improve business credit by using financial products
In addition to working with suppliers to build your company’s credit, there are specific financial products out there designed to help poor-credit individuals build good business credit scores.
It’s one of the most common problems in the business — how do you get credit when your existing credit it poor? It can feel like a never-ending cycle. No one is willing to extend credit to a business that doesn’t have credit. So, where do you begin?
Check out these two types of financial products that were designed specifically for business people with poor personal credit.
Credit builder loans: These loans are available at many regional banks and credit unions. Here’s how they work: a financial institution offers you a small loan (we’re talking like, $1000). You can’t touch that money but you start paying interest and principal back on that loan. When you fully pay back the loan, you get access to the principal of the loan. It’s not really a functional loan — you’re basically paying upfront in full for a loan — but it is reported to D&B and will work to build your business credit, even if your personal credit is bad.
Self Lender is an online financial service company that only offers credit builder loans for individuals.
Secured business credit cards: Like credit builder loans, secured business credit cards are designed for people with poor credit. A secured business credit card works like any other credit card, but with one crucial difference: You have to give a security deposit (generally around $200) to get the card. Spend with it, buy stuff for your business with it. Those purchases and your monthly payment history will be reported to the credit agencies. The security deposit basically sits there in case you default on all your payments. You can also add to the security deposit to increase your credit line.
The credit builder loan and the secured business credit card are two available options to use to improve your business credit even if your personal credit is shot. They’re not long term solutions — once you’ve improved your business credit, there are better and cheaper options to use to borrow money. But they’re appropriate tools to
Build business credit by piggybacking someone else’s credit
Another strategy to build business credit for people who have poor individual credit is the piggyback method. If your individual credit is so poor that when you walk in to a bank and apply for a loan, you get rejected, you’re going to want to think about getting someone else to provide a personal guarantee.
This strategy requires an insider (it tends to be an equity owner or an executive or a board member) to put her personal credit on the line, personally guaranteeing to pay back a business loan if the business defaults. By piggybacking the personal credit score of a personal guarantor, a business can qualify for loans and other credit products, and begin building stronger credit of its own.
Start improving your personal credit to improve your business credit
Though it may feel like bitter medicine, it makes sense to improve your personal credit. As much as sound business finance advice requires separating your personal finances from those of your business, it’s an ongoing process and until your business really builds its own credit, vendors and banks will continue to look at your personal credit, too.
So, it may be a long, hard path, but it’s really worth working on and improving your personal credit, using many of the same tips for businesses take to improve their credit.