Can you establish good business credit if you have bad personal credit? The answer is yes…but with a few caveats.
Business credit reports and personal credit reports are generally completely separate databases for legal reasons. However, there are some exceptions in terms of how independent that information may be:
— If you are operating as a sole proprietor or Limited Liability Company, it is difficult to separate your personal and business credit. A corporation is a much better structure to build a completely independent business credit report.
— Experian sells a credit score that is a combination of the business owner’s personal credit history and the businesses’ credit history.
In the early years of a business, the owner will almost certainly be required to personally guarantee loans. However, as you establish a strong business credit rating for your enterprise, you’ll have more leverage to negotiate for a loan without your personal guarantee.
A warning: some people try to use business credit file to repeat bad credit habits.
“I’ve seen people who ruined their own credit go out and start a business, enlist the help of people with good personal credit to be executives in the company, and get major credit cards. They didn’t have a real product or service, and the objective was to just get credit. They would inevitably default on the corporate credit lines,” says Erik Salmon, Director of Business Credit Services for Innovative Business Services (IBS) and an experienced business credit coach. If that’s your intention in establishing a business credit rating, you’re better off taking some personal finance courses to learn how to manage your money.
If, however, you legitimately want to make a go of a business, have a solid plan, and are willing to do what has to be done to get it off the ground, then you should let a bad personal credit rating stop you. Building or rebuilding good credit – whether it’s personal credit or business credit – is a process. Be patient as you work on both your personal and business credit. The results will be worth it.