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n some ways, running a growing business is like sending a child to college. You have to get the ball rolling, but you want it on its own two feet as soon as it's ready.
Business credit is essential to that process. Just as a young adult builds financial independence with credit cards and car loans, your business earns creditors' trust by managing its obligations.
Some entrepreneurs use personal credit to build business credit, especially in sole proprietorship situations where the individual and business are the same legal entity. But what if you don't want to—or can't—put your individual credit on the line?
In this article, you'll learn how to build business credit without using personal credit. But first, you need to understand the benefits of separating the two.
What is business credit?
Business credit demonstrates your company's creditworthiness and borrowing ability based on its financial history. Strong business credit means your business pays its bills on time and hasn't defaulted on loans or credit cards.
Several credit rating companies measure and score business credit. Two major consumer credit bureaus, Equifax and Experian, have business credit scoring models distinct from their commercial systems. Dun & Bradstreet (D&B), a leading business data firm, also has a scoring model known as the PAYDEX® Score.
Business vendors and creditors use these scoring models to determine your business's financial reliability. Improving your score lets you access cheaper financing, more attractive vendor agreements, and more. A good business credit score also means you rely less on personal credit to finance your business.
For more information check out our guide on How to Get a Business Credit Card
Are business and personal credit linked?
Business and personal credit exist separately, but the level of separation can be a fine line. For example, if you apply for a small business credit card, the card issuer will usually check your personal credit history.
Most card issuers require business borrowers to guarantee their credit personally. These guarantees make the individual responsible for debts if the business defaults. If a default happens, your credit report will reflect the default, and the company could sue you for the debt.
Your business card's credit activity could appear on your personal report even if you don't default. Some lenders report business credit card information to consumer agencies, and those reports could affect your credit.
Some business owners are comfortable allowing their personal and business credit to influence one another; others prefer to keep the two credit types separate. Either way, you have options for building your business credit.
How to leverage personal credit to build business credit
If you have strong personal credit, you can use it to open a business credit card and start building business credit. Prioritize making on-time payments to that credit card.
Also, avoid using too much of your credit allowance. Bank of America recommends keeping your business credit card usage below 30% of its limit.
Meanwhile, encourage your vendors and suppliers to report transactions to Dun & Bradstreet, even if you pay through a personal account. D&B collects this payment information and uses it to compile your PAYDEX® score.
Steps to building business credit without personal credit
You don't need to rely on consumer credit to establish a business credit history. By separating business and individual finances, you can earn a strong credit score for your organization while protecting your personal assets.
1. Choose a corporate or limited liability business structure
Your personal and business credit histories are more straightforward to separate if your business is a distinct legal entity. Sole proprietorships and unlimited liability partnerships do not create this separation.
Separate legal entities include limited liability companies (LLCs), C corporations, and S corporations. Consult with an attorney or accountant to determine which might suit your business.
Don't give up if you can't create a separate entity yet. You can still build business credit as a sole proprietor, but it's more likely that you'll have to use personal credit.
2. Apply for an Employer Identification Number (EIN)
An EIN is an identification number that tracks the tax responsibilities of employers and certain businesses without employees. Having an EIN allows creditors and credit bureaus to track your business's income and payment history separately from your personal financial history.
An EIN is essential if you're a sole proprietor learning how to build business credit without using personal credit. EINs indicate separation of financial responsibility in a way your business structure won't. An EIN may also provide certain legal protections for your personal assets.
3. Get a Dun & Bradstreet number
The Dun & Bradstreet D-U-N-S® number allows you to take advantage of D&B's Live Business Identity, which tracks an organization's financial health and creditworthiness. Vendors, suppliers, and creditors can use D-U-N-S® data to evaluate your business credit and determine whether to work with you.
4. Open a business bank account
A bank account separates your business and personal finances by recording daily business transactions. You can use your bank statements on loan, vendor, and credit card applications to verify your payment history.
5. Negotiate accounts with individual vendors and suppliers
Smaller businesses can start building credit through individual supplier relationships. If you have a good relationship with a supplier or vendor that reports to D&B, you may be able to set up a short-term credit arrangement. Each on-time payment builds your credit profile.
6. Monitor business credit reports
Tracking your business credit score is as important as checking your individual credit. Mistakes happen, and the sooner you contact the appropriate credit bureau and request a correction, the better. Resolving errors helps you maintain the high credit score you've earned.
7. Apply for corporate credit
Once you have a distinct business entity and a solid financial history, you can apply for a corporate credit card. Unlike small business cards, which you apply for using your personal history, corporate credit cards use the organization's annual revenue and financial status to make qualification decisions. This creates a complete separation from personal finances, but these cards require a longer business financial history.
If you're learning how to build business credit without using personal credit, think of corporate credit as a medium-term goal. Your vendor credit accounts and on-time payments from your bank account will help get you there.
Common ways to build business credit
Some businesses will build their credit history entirely through business account purchases, while others will use a founder's or owner's credit. Others take a balanced approach, which is why it's essential to understand your options.
In that spirit, here are three more ways you can build business credit with or without using personal credit:
- Take out a Small Business Association loan and make on-time payments through a business account
- Apply for a business line of credit, which lets you fund your business with borrowed assets up to a set limit
- Find new opportunities for tradelines, a type of formalized buy-now-pay-later arrangement for business-to-business contracts
Add these ideas to the concepts you learned here, and start building your business credit. Remember to borrow only as much as your business can afford to repay.
Start building your business credit: Key points to remember
As you master how to build business credit without using personal credit, remember to keep the two as separate as possible. Important steps include:
- Creating a distinct business identity
- Opening a business bank account
- Applying for credit with vendors and suppliers
- Tracking your business credit through reporting bureaus
A reliable business bank account gives you an essential foundation. Novo connects you with a business checking solution that includes FDIC insurance through our sponsor bank - Middlesex Federal Savings, no minimum balance, and no fees. Get started by creating your account today.
Novo Platform Inc. strives to provide accurate information but cannot guarantee that this content is correct, complete, or up-to-date. This page is for informational purposes only and is not financial or legal advice nor an endorsem*nt of any third-party products or services. All products and services are presented without warranty. Novo Platform Inc. does not provide any financial or legal advice, and you should consult your own financial, legal, or tax advisors.
Novo is a fintech, and not a bank. Novo acts as a service provider to Middlesex Federal Savings, F.A., and the deposit and banking products obtained through the Novo platform are provided by Middlesex Federal Savings, F.A.
