How to Build a Strong Business Credit History

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Jean Chatzky will be covering a variety of different topics in this space every month. Come back next Tuesday for the fourth article in this month’s Relationships series. Please leave your relationship questions as comments below and she will address several of the questions at the end of the month.

One thing I frequently write and talk about is your credit score. It’s an important element of your financial lives, and if you don’t have a good one (mid-700s or above), you’re going to have a hard time borrowing at a decent interest rate, if at all.  You may also pay more for insurance.

When you’re wearing your small business hat, credit is also important.  You may have had to borrow to start your business, and you very likely have a credit card dedicated to business-related expenses.  A good score means vendors will more likely sell to you on credit, under the condition that you’ll pay them over time.

But one thing that’s become clear during the credit crunch is how important it is to keep your personal credit history and your business credit history as separate as possible.  Financing your business on your personal credit could harm your family’s ability to get the things they need, whether that means an auto loan, a mortgage or simply a credit card.  Here are a few ground rules to keep in mind:

• Bank independently.  A lot of businesses, particularly those without a lot of startup expenses, are bankrolled with the owner’s own money.  That’s okay, but you really want to separate things as soon as it’s feasible, says Barbara Weltman, a small business expert and author of The Rational Guide to Building Small Business Credit.  “It’s so obvious, but you’d be surprised how many people don’t do it.  You really need to set up a separate business bank account and a separate business credit card.  That’s actually one of the first things you should do.”  A lot of people wait until money’s coming in, but at that point, it might be hard to pull things apart.  Most banks have products dedicated to small businesses.  As for the credit card, you can apply for a business card.  You might have to start out with a low credit limit, but it shouldn’t show up on your personal credit report.   

• Understand how business credit scoring works.  As an individual, creditors report your information to the three major credit bureaus.  They organize it into your credit report, then another company, FICO, calculates your credit score. That’s the score that is pulled by lenders when you want to apply for a credit card, obtain a car loan or finance a house.  Business scoring works differently. The major credit bureau is called Dun & Bradstreet.  “They have a lot of different reporting formulas and standards, so they don’t have a single simple FICO equivalent.  But businesses pay by the report, or if you’re doing this regularly, you might have a subscription, so you get X number of reports,” explains Weltman.  When a company (say, a vendor) is deciding if they want to do business with you, or extend you credit, they’ll likely pull your Dun & Bradstreet Business Credit Report.  You can pull a copy of your own company’s report for free at www.dnb.com/eupdate.  You can also apply for a D-U-N-S number, which is how D&B tracks your information on its website site.  
  

• Build up your business credit history.  The stronger your business credit history is, the less likely you are to have to use your personal credit history to guarantee loans or purchases.  This requires you to be proactive, says Weltman, especially as a small business. “The real problem is that small businesses often do business with other small businesses, who don’t necessarily report to D&B.  It’s very difficult for a small business to passively build up a good credit report, because there just aren’t that many people reporting.”  If the companies and businesses you’re working with don’t seem to be reporting, you can sign up for D&B’s self monitoring service and add the information yourself.  They’ll then call and verify with those companies, and, provided you’ve been a good borrower, it will add weight to your credit history.
  

• Continue to monitor your personal credit history.  Until your business history is strong enough – and, sometimes, even after your business credit history is well-established – borrowing will sometimes require you to personally guarantee a loan or line of credit, which means you want to keep your personal history in tip top shape, says Weltman.  If you’re in business with your spouse, and you’re concerned about hurting your family’s credit if you fall behind on your business debts – or one spouse has poor credit – you may want to establish your company so that only one of you actually owns the business.  
  

Jean Chatzky, award-winning journalist and best-selling author, is the financial editor for NBC's "Today," a contributing editor for More magazine, and a columnist for The New York Daily News. She is the author of six books, including her newest, Money 911: Your Most Pressing Money Questions Answered, Your Money Emergencies Solved. Check out Jean's blog at JeanChatzky.com. You can also follow her on Twitter and Facebook.

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