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Your Small Business Should Have Its Own Credit Score

Sept. 14, 2016
Running Your Business, Small Business, Starting a Business
Why Your Small Business Needs Its Own Credit Score
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By Heather Castle, CFP

Learn more about Heather on NerdWallet’s Ask an Advisor

Many people understand the importance of their personal credit score. Most lenders use them to determine who will receive financing opportunities — such as auto loans, mortgages and lines of credit — and on what terms. Your score tells lenders how likely you are to repay loans.

But if you’re a small-business owner, your business can and likely should have a credit score separate from your personal one.

Why your business needs a credit score

There are several advantages to having a separate business credit score. First, it helps protect your personal credit from a possible business failure. It also works in reverse: If you’re just starting your business, and your personal credit history isn’t so great, you can still establish business credit.

Once you’ve built your business score, you’ll have a better chance of raising capital for your small business, either from small-business lenders or credit card companies. And a good credit history should get you better terms.

Finally, building a business score can help you promote and maintain a good image of your company. You need to consent for people to view your personal credit score, but others can access your company’s credit score at any time.

» MORE: How to get a business loan in 5 steps

How to build a business credit score

Your business’s credit is based on factors including its size, its account balances, whether it pays its bills on time, and the risks associated with your industry.

You can develop your business’s credit history by applying for a credit card in its name. Make payments on time, and avoid maxing out the card. Credit bureaus like to see that you’re not using all of your available credit.

You can also build credit by asking vendors with whom you do business to report your payments to a credit bureau. This record of payments to suppliers helps you build a history of trustworthiness.

How tax status affects business credit

Your business structure can affect the way you build a credit score. If you have a sole proprietorship or partnership, you file taxes under your Social Security number. Before applying for a credit card or business loan, you’ll have to request an employer identification number — that’s a unique number businesses receive for easy verification by the IRS. This can be a long process and requires information and documentation.

Corporations and LLCs, on the other hand, are taxed differently and receive their EINs from inception, making it easier to build business credit.

If you’re interested in additional resources, check out some of the business credit bureaus, such as Dun & Bradstreet, Equifax Business and Experian Business. These use a matrix of creditworthiness to create a credit score for your business.

Remember, building good business credit is like building your own personal credit: It’s a process that takes time. Have some patience as you and your business grow.

Heather Castle, CFP, is the founder of Castle Wealth Advisors LLC in Los Angeles.