Updated: Feb 3, 2022
Are you one of those people who are reluctant to apply for business credit if you know you'll be required to attach your personal social security number to the credit application? After all, that's kind of redundant, isn't it? Especially when the goal is to take every step possible to separate your business from your personal credit?
Unfortunately, this is a fear (often, unfounded) that's drummed along by companies purporting ways to give you access to outrageous amounts of capital without requiring the use of personal information. You should be told up front, though — what they're promising is far from the truth.
Any reputable credit adviser will tell you the truth — that you may need to provide your social security number, birth date, and other personal information to achieve certain types of credit, such as bank loans, working capital, and credit cards, even if that credit doesn't, in the long run, require a personal guaranty.
It wasn't always like that, and here are two reasons why...
First, government regulations, specifically the Bank Secrecy Act and the Patriot Act, now require banks and financial organizations to perform adequate “know your customer” processing when opening new accounts.
The Bank Secrecy Act (or “BSA”) requires that banks and other financial institutions in the United States file currency transaction reports (known as CTRs) and suspicious activity reports (known as SARs). Collecting information, maintaining records, and filing reports enable law enforcement to conduct some types of criminal investigations and provide regulatory agencies with the ability to monitor for noncompliance.
The USA Patriot Act, passed in 2001, was a direct result of the 9/11 tragedies, and amended the Bank Secrecy Act to mandate that all statutory financial institutions establish an anti-money laundering program, obligating each institution that is subject to reporting to develop, implement, and maintain that program.
This matters to you because, through recent BSA enforcement actions, the anti-money laundering program requirement has now been extended to include non-bank issuers, sellers and redeemers of stored-value cards, including money services businesses and operators of credit and debit card systems.
By requiring you to provide your social security number when opening an account, as well as an ID and actual physical address, banks and program managers can comply with these federal laws.
Second, because the banks can now be held liable for any illegal activity if they don’t adequately take steps to identify you when opening an account, payment card networks have taken additional steps to comply with the federal laws, and are reducing their liability by instituting rules for all issuers and program managers associated with all credit, debit, and prepaid debit cards.
The result of all these regulatory and legal issues are that you need to adequately identify yourself before you are issued any alternative form of payment other than a store-purchased money-order. Unfortunately, the way most issuers and programs have decided to identify you is to require that you provide your Social Security Number and address.
Non-US residents who don't have a social security number, such as foreign students, can establish credit by providing their foreign passport and 1-20 form, but, in most cases, they will also be required to provide evidence of deposits in an established US bank account, and the credit card they achieve is secured using funds in that account.
Of course, the ultimate goal should not be whether or not you are forced to validate your identity to meet the above requirements, but whether or not you'll have to personally guaranty any credit your business seeks to achieve.
If everyone is having to provide the same form of ID, then what truly sets you out from the herd is not going to be your ID, but the strength of the credit behind that identity. And, this is where the "business credit versus personal credit" guidelines of the Fair Credit Reporting Act get abused on a daily basis.
The Fair Credit Reporting Act is supposed to pertain ONLY to consumer credit, not commercial credit. This regulation specifically states the ONLY time the FCRA can pertain to corporate credit is IF — you guessed it — personal identifiers are used when establishing that credit. And yes, your SSN is considered your personal identifier...
This is where credit issuers use their escape clause or "discovery" clause, insisting they only use the credit scores they "discovered" during the identification process as factors in determining your approval amount and interest rate. If that were truly the case, EVERYONE with a valid SSN would get business credit, but the interest rate and amount of that approval would vary from score to score, and we all know that isn't the case.
This isn't to say that business owners with poor personal credit scores can't get substantial commercial credit. It just means you will likely need to back up your request with a strong corporate credit profile that validates the business, provides proof of creditworthiness, and assures potential creditors that your company can (and does) stand on its own merit, irregardless of your personal credit history.
Some Do's and Don'ts You Should Know
When required, always provide the social security number of a listed owner or officer. This person should be either yourself or someone who is legally bound to the organization and any responsibilities and constraints that come from that association.
Never allow your SSN to be used for credit responsibility purposes by any business if you are not listed as an owner or officer in legal documentation. Remember, an authorization to act for one is an agreement to act for all.
Never input your EIN into a slot intended to accept a SSN. Since both contain nine numbers, computers that process applications don't know the difference between the two sets of numbers. A personal credit report will be pulled on the individual who bears the SSN that coincides with the EIN you entered, and you and your business may suffer a decline due to that person's wretched credit scores. Even worse, you could get flagged for attempted identity theft.
When a space is provided, include your D&B DUNS number. If the creditor is requesting this information, it's a good indicator they will rely on your D&B file for guidance on your approval, and usually also means they will report your credit line and payment history back to D&B on a monthly basis.
Don't leave the SSN space blank. This is a clear red warning flag to potential creditors. In short, you are saying you aren't willing to stand behind the strength and responsibility of your business, so why should they?
Most business credit gets reported to at least one of the main corporate credit bureaus. If you pay your debts on time, and don't spend beyond your ability to repay, every piece of credit you achieve should work toward an ability to garner more down the road.
Any creditor who doesn't report automatically to the bureaus may qualify to report manually to D&B. Adding solid payment history from just one vendor or supplier can raise your credit scores and ratings by up to 90%. For small businesses and entrepreneurs, this is usually a good way to build credit quickly.
Remember, building credit for your business also reduces the burdens your commercial expenses may be placing on your personal credit. Separating business debts and liabilities from your personal credit can, and usually does, improve personal credit scores along the way, especially if your commercial creditors are also reporting to the consumer bureaus.
If you have any additional questions, please feel free to reach out to me directly at 800-918-7505 ext 2, or book an online appointment for a free one-on-one consultation HERE.