This is a condensed version of an article by OnDeck. Reprinted with permission.
By Ty Kiisel
Many small business owners leverage their personal credit in the early years of starting a business, but as quickly as is possible, it’s better for a business to start building business credit. Here’s why.
A personal loan doesn’t help build your business credit
Building a strong business credit foundation should be a priority during the first few years in business. This can feel like a catch-22—you need to have business credit to demonstrate you can be responsible with business credit, but you can’t get business credit because you don’t have a track record that demonstrates you can be responsible with business credit. A challenge? Yes. But there are some things you can do.
One option is pursuing trade credit relationships with their suppliers, according to Peter Bolin, Director of Consulting and Analytics for Experian, in an interview published last year on BusinessLoans.com. “Make sure they report to the credit bureaus, like Experian,” he adds. If they don’t, your good credit practices may be building a good credit record with that particular vendor, but you’re not doing anything to build you business credit generally. This is important enough to encourage those suppliers who don’t report to do so.
You can also apply for a business credit card, or for a small business loan via specialized small business lenders like Lending by Wave, in partnership with OnDeck, and make sure you make those payments on time. This will dramatically increase the depth of your credit report so when you do need that $100,000 from the bank or other lender, you’ll be likely to get approved.
You might be hurting your personal credit score
Maintaining a good personal credit score will always be important. With that in mind, using your personal credit for business expenses might not be the right choice.
A big part of your personal credit score is based upon how much credit you have available versus how much credit you actually use. Maxing out a credit card, for example, could negatively impact your personal credit score. This may be true even if you regularly make the required payment every month.
When I recently asked if using personal credit for business might hurt a borrower’s personal credit score, Bolin’s response was, “Yes, it does. Their higher utilization of personal credit to the credit available to them pulls down their personal scores.”
Business owners will always find a way for their projects to survive and succeed. But to be successful in the long run, remember to preserve your personal credit reputation AND build a business credit score at the same time.
—Ty Kiisel writes about small business and small business finance for OnDeck, and outlets like Forbes.com. An expanded version of this article, with additional questions for you and your potential lender, is available at OnDeck.
The information and tips we’re sharing in this article are meant to be a starting point for your year-end tax prep, so you can be informed and feel confident when working with your accountant. Be sure to check with a tax expert in your country or region for any specific advice you need, as each business (and tax district) is different. As our lawyers would say: “This article is for informational purposes only. It should not be considered legal or financial advice.”