Need Business Credit? Build Your Personal Credit First

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The most exciting opportunities in a small business often arrive unexpectedly. And sometimes, taking advantage of them requires money — more than you may have at the moment. Whether you need to fill a big retail order or hire contractors to complete a professional services contract, you'll be able to act a lot more quickly if you have business credit lined up.

Many small business owners don't realize that their personal credit plays a big role in obtaining the business credit they need until they actually apply for it. Entrepreneurs are often surprised to discover that for both small-business loans and business credit cards, lenders typically require a personal guarantee.

It's very difficult to get credit based solely on the business's credit profile unless you run a very substantial-sized business. So how can you get business credit if you have a limited personal credit history or made mistakes with your personal credit in the past? There's really only one answer if you want to borrow at attractive interest rates. It's buffing up your personal credit.

Fortunately, you can make a difference in your credit profile quickly if you start doing the right things today. Here are some strategies to put into action ASAP.

Create a wall between your business and personal finances

If you've been using your personal checking account to deposit payments from clients, make this the week you get serious about your finances and open a separate business checking account. To do so, your bank will probably require you to have an employer identification number (EIN), so make getting one your first step, if you don't have one already. You can apply online for an EIN from the IRS.

Keeping a separate business bank account will help you to maintain the protections that come with your business entity, if you have set one up, safeguarding you from financial liability. It will also force you to bring valuable discipline to how you manage your business and personal finances. If you are constantly raiding your business bank account to pay personal bills or vice versa, you probably don't really know where you stand in either area. Getting clear will help you to make better financial decisions in both arenas, which should ultimately lead to better credit.

Know your personal credit score

If you have poor personal credit, it will be hard to get a business loan. Many people don't know their score, so take a few minutes to find out what yours is this week. You can buy your personal credit scores from each of the three major credit bureaus (Experian, TransUnion, and Equifax), and at MyFICO.com. It usually costs less than $20.

Many credit cards also offer free credit scores for cardholders. While each paid and free credit score will be slightly different from the one ultimately used by your business lender, they can give you a good estimate of what that score will be. (See also: Are Free Credit Scores from Credit Cards the Real Thing?)

Your FICO credit scores — the ones used most often by lenders — reflect five factors, including your payment history, the amounts owed, the length of your credit history, your credit mix, and new credit (opening a lot of new cards can be considered risky behavior).

FICO scores range from 300 to 850. If you're going after a small-business loan, most lenders want to see a FICO score of 700 or better. If yours is below that, take the time to rebuild your credit before applying for business credit.

Take charge of your personal debt

Pay down any balances on your personal credit cards as quickly as you can. It will be hard to get business credit if you are maxed out personally.

Focus on the cards with the highest interest rates and highest credit utilization to improve your situation most quickly. (With revolving credit, lenders look at the ratio of your current balance to your available credit to come up with a credit utilization ratio. The lower your credit utilization, the better.)

If you have maxed out one personal card but other cards are empty, consider spreading the debt among those other cards by doing a balance transfer. Ideally, look for a 0% APR balance transfer deal.

Limit use of your personal cards

If you know you'll need business credit in the next three to six months, do all you can to limit your current spending on personal credit cards, unless you're paying off the balance each month. Make sure to pay all of your credit card bills on time, as well.

Running a business inevitably comes with financial surprises. The more work you do to keep your personal credit in shape, the easier it will be to handle the unexpected — and the more peaceful your life will be.

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