How to open a credit file for a new business

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Dear Business Banter,

My parents gave me $100,000 for my startup. I’ve never had a credit card or a loan except for being on their credit card. Is there a way I can put that money into a bank and borrow from it to start a credit file? I’m 19. – Justine

Dear Justine,

Your parents must have considerable faith in you and your idea, and that’s a wonderful thing. Now it’s time to inspire lenders to have that same level of confidence.

Before you do anything, open a checking and savings account at a bank or credit union that is specifically for your business. Deposit the cash, and don’t touch it for anything personal.

How your business is structured affects your need to create a business credit file.

Have a business question for Erica? Drop her a line at the Ask Bankrate Experts page.

As a business owner, you have the option to be and remain a sole proprietor. That means there is no legal difference between you and your enterprise. In that case, your consumer credit file will also be for your business affairs. When you apply for business credit products, the lenders will check your Equifax, TransUnion and Experian reports and the credit scores that are derived from them to determine eligibility and set terms.

Even though you haven’t had credit products in your name only, you almost certainly have the beginnings of a consumer credit file. Because your parents added you to their credit card as an authorized user, that account should have been appearing on your credit reports for at least one year. Although some credit card issuers furnish account information to the credit reports of authorized users who are under the age of 18, not all do.

Assuming your parents managed the account well by keeping the debt significantly below the credit limit and always making the payments on time, that credit card has been building a positive credit history for you.

Check your three credit reports from annualcreditreport.com and your FICO and VantageScores. When you know where your credit stands, you can apply for the right credit product in your name. It might be a personal card that you use only for the business, or a small business credit card that you never use for personal expenses.

Apply for a business credit card

There are a tremendous number of business credit cards on the market, and almost all are rich with benefits tailored to meet the needs of a budding and full-fledged entrepreneur. As long as you earn money independently, you can apply for a business credit card.

If you don’t qualify for an unsecured credit card, you can use a portion of the funds you’ve set aside as collateral for a secured account. The credit lines are usually the same as the deposit, so if you put down $5,000, that will be your charging limit. With regular and responsible use, your credit rating will increase, putting you in the position to qualify for unsecured credit products later.

With this strategy, you won’t have to establish business credit because all of the lenders will be supplying your account activity to your consumer credit file. There’s nothing more for you to do except keep all the accounts in good standing by paying on time and ensuring a low credit utilization ratio. Just remember that what you do with these business cards will affect your personal credit history.

Opening a business credit file

On the other hand, your business may be established as a separate legal business entity, such as a partnership, cooperation or limited liability corporation (LLC). In that case, you will need to know how to open a business credit file.

These commercial credit reports are developed by Dun & Bradstreet, Experian Business and Equifax Business, and they house the information only from your company’s credit products and business affairs. Your personal credit products are not listed.

In addition to the designated bank account, you’ll need to get an employer identification number from the IRS and a separate business phone number. Apply for a D-U-N-S number, too.

After that, you can start up your business credit by borrowing and repaying money. Since your business is still in the beginning stage, focus on credit cards that are ideal for startups. If you’re ineligible because the business is too new and you don’t have a proven revenue stream, don’t panic. You have the resources to minimize risk. Again, the cash you have tucked away can act as collateral. If you default on the debt, the credit issuer can claim the money held in reserve.

When you have the credit products associated with your business, the lenders will send the activity with them to the commercial credit reporting companies. Just as with consumer credit reports, the information on these reports is scored. To build business credit it is essential that you pay on time, since some scoring models only use payment history as a factor.

Bottom line

Back to the money from your parents, and how it can help you build your credit file—whether it’s personal or business.

If you need to purchase necessary products or services but have to wait for others to pay you, charge the costs rather than use the cash directly. You’ll have roughly 30 days to come up with enough to pay the bill in full. If you can’t, delete the balance with the funds held in reserve. When you are reimbursed or turn a profit, replace the money into the bank account. This way you’ll guarantee a perfect payment history and won’t be carrying over expensive debt—all while earning valuable credit card rewards.

Moreover, not only will your parents and creditors have trust in your ability to run a business, you’ll have it in yourself.