Using business's tax ID is no shortcut to building credit
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Dear Your Business Credit,
I would like to build my credit up with my tax ID, but my personal credit is not good. Can you help me? -- Marcus
As I suspect you've already discovered, when you are looking to borrow for a small business, both banks and credit card issuers tend to say yes or no based on your personal credit profile -- even when issuing credit in the name of a business. Usually, they want small-business owners to give a personal guarantee so they have someone to come after if the debt goes unpaid. That puts you at a disadvantage if you haven't built up much personal credit because you're young or don't have much need to borrow -- or if you have made some credit mistakes.
I wish I could give you a quick and easy solution, but in a small business, you generally can't bypass using your personal credit and jump straight to using business credit alone. Lenders will usually rely on the business's credit, tied to a federal tax ID, only when the company has become pretty substantial in size. But even in those cases, they may want a personal guarantee from the business owner to issue loans.
The only lasting solution for entrepreneurs is to do the work to build up good personal credit. That takes patience -- something that, alas, is hard for many action-oriented business owners to summon. It's similar to getting in shape. Sure, it would be nice if there was a way to get really buff by next week, but for someone who has never worked out -- or slipped into bad health habits -- it takes some time and commitment.
Now for the good news. Building up good personal credit is not rocket science. If you can get any credit card at all, you will have an opportunity to start building a history of paying your bills on time. Look at your credit profile as a billboard that tells lenders two things: whether you pay your bills and if you do so on time. Every action you take to show the answer to both questions is always yes will help you build your personal credit.
If your personal credit is not good, you may need to get a secured card to start. With secured cards, you must give a security deposit equal to the credit line. Secured cards may sound similar to prepaid debit cards, but there's one crucial difference. Most secured cards let you build a credit history. As you build good personal credit, you should be able to replace the secured card with a traditional card.
In the meantime, take steps to establish separate business credit. Open a separate business checking account, if you haven't already, and keep your personal and business finances separate.
If your bank sees you are managing your checking account well, your banker is likely to approach you with a business credit card offer. Once you get that business card, start putting small charges on it and pay the balance way before the deadline. Before you know it, you won't have to be worrying about finding work-arounds to poor credit, because card issuers will be filling your mailbox with offers.
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