I hear this question often from business owners who are seeking my help to obtain an unsecured business line of credit. Many of these business owners want to separate their personal credit from their business credit and believe that obtaining an unsecured business line of credit will enable to them to do that (and build a business credit history). While separating your personal credit from your business credit is very doable, obtaining an unsecured business line of credit may or may not help you build a business credit score. Here are a few reasons why obtaining an unsecured business line of credit to build your business credit history may be a hit or miss.
You must provide a personal guarantee – To obtain an unsecured business line of credit, you must provide a personal guarantee. This means a lender will check your personal credit history to determine if you qualify for an unsecured business line of credit. Lenders like Capital One will also report your unsecured business line of credit usage to the personal credit bureaus (i.e. Experian, Equifax and Transunion). This is why it is important to ask a lender if they will report your unsecured business line of credit usage on your personal credit reports. Reporting the usage to your personal credit will not help you build business credit and could hurt your personal credit if you max out the line of credit, make late payments, or default.
Some lenders will not report usage – Some lenders will not report your unsecured business line of credit usage to the business credit bureaus (i.e. Equifax Commercial, Experian Business, and Dun & Bradstreet). The key to building a business credit history is to have your business credit accounts report to the aforementioned business credit bureaus. Since all lenders will not report your unsecured business line of credit usage to the business credit bureaus , it would be wise to ask a lender if they do before you apply for an unsecured business line of credit with them. Some lenders will report them to Experian Business and not the others. If you get an unsecured business line of credit from a lender that does report to Experian Business, it may certainly help you build your business credit.
Your personal credit history will always be a factor – No matter how much business credit history you have as a business owner, lenders will always review your personal credit as well to determine your creditworthiness. For example, if you are applying for an SBA loan under $350,000, be prepared to have a lender check your business and personal credit. The SBA is now requiring lenders to use what’s called the Liquid Credit SBSS score to determine if you are eligible for an SBA loan. The Liquid Credit SBSS score (also called the Liquid Credit Small Business Credit Score) is a combination of your business and personal credit scores and is used to determine whether or not you will be approved for an SBA loan. You must have an SBSS score of at least 140 to qualify for an SBA loan under $350,000.
You Can Build Business Credit Other Ways
Since obtaining an unsecured business line of credit is not always a surefire way to build a business credit history and score, you could try using vendor tradelines instead. Vendors tradelines are issued to business owners by companies like Quill, Office Depot, and Best Buy. These companies will often approve you for a vendor line of credit that enables you to purchase office supplies and equipment from them. Many vendor tradelines do not require you to provide a personal guarantee or have excellent personal credit to get approved (unlike unsecured business lines of credit). Many vendors also report your tradeline usage to Dun & Bradstreet which can definitely help you build your business credit score.