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If you own a small business, the line between personal credit and business credit may seem blurred, since you and the business are essentially one and the same. But it can be wise to keep your personal and business credit as separate as possible. This can make it easier to qualify for business financing, and also protect your personal finances and assets should your business experience any financial struggles. Read on to learn the difference between business and personal credit, how one type of credit can affect the other, and how to develop two strong (but separate) credit histories – one for yourself and one for your business.
What Is Business Credit vs. Personal Credit?
Your personal credit score and business credit score are two distinct but related numbers that tell lenders how creditworthy you, or your business, are.Your personal credit is connected to you by your Social Security number and relates to your personal financial history. If you’ve ever applied for a car loan or home mortgage, lenders have looked at your personal credit scores to determine how financially responsible you are, and what sort of risk you present as a borrower. Your business credit, on the other hand, is linked to you by your Employer Identification Number (EIN), which is how the government recognizes your business for tax purposes. Technically, you don’t need an EIN if you’re a sole proprietor. However, you will need to get one if you want to establish business credit.
Business Credit Score
Business credit works much the same as personal credit, except that it looks at the financial responsibility of your company, not you personally. Any business loan or business credit card you have will impact your business credit report and credit scores.You actually have three primary business credit scores from three business credit bureaus:
Experian
Dun & Bradstreet
Equifax
Each agency has its own credit scoring model, or algorithm, to calculate your business credit score. Typically these agencies will look at your company’s:
Current debt
Payment habits
Available credit
Trade credit
Liens and bankruptcies
Time in business
Type of industry
Personal Credit Score
There are also three personal credit bureaus:
Transunion
Experian
Equifax
Each of these agencies has their own formula for how they calculate personal credit score, but they typically look at your personal:
Payment history
Total debt owed
Credit utilization (percentage of credit available that is currently being used)
Length of credit history
Types of credit (e.g., credit cards vs. loans)
New or recent credit
How Do Business Credit Scores Work?
Your business credit scores are an indication of how well you manage your business’s finances. A low business credit score might indicate that you have made some poor financial decisions in the past, and that might make a lender wary of approving a loan for your business. On the other hand, high scores say that you know how to manage your money, which means the risk in lending to your business is low.Unlike consumer credit scores that typically range from 300 to 850, business credit scores are generally based on a scale of 0 to 100. A lender will likely view business credit scores between 80-100 as low risk, 50-79 as medium risk, and 1-49 as high risk. Good credit is an asset to any business. It can help with securing credit cards, different types of small business loans, and commercial leases, as well as help you negotiate better terms with vendors. In addition, a good business credit score can prevent you from having to put your personal assets or creditworthiness on the line to secure a loan or credit card.
How Do Personal Credit Scores Work?
Your personal business scores are an indication of how well you manage your personal finances. When you take out your first credit card or get a loan to pay for college, you begin your personal credit history and start building your credit score from that point on.Your personal credit score will typically be a number in the 350-800 range, with 800 being a “perfect” score. If you pay your bills on time, have a mix of credit (such as different credit cards, a car loan, and a mortgage), don’t use a lot of your available credit at any one time, avoid financial set-backs (like a foreclosure), you will likely build a strong credit profile and score. However, if you consistently carry a credit card balance, skip bill payments or pay them late, don’t develop a diverse mix of credit sources, and/or rack up many “hard inquiries” on your credit score (which occurs when you apply for a new source of credit), your score will likely be on the lower end.
Key Differences Between Business and Personal Credit
In many ways, these two scores are alike: They tell lenders if you are a good bet to repay your debts, which can influence their decision to extend you credit at all, and at what terms. But there are also plenty of ways in which these two scores differ. The obvious one is that one score reflects your personal financial history, while the other reflects your business dealings. But here are some other key differences between business and personal credit scores.
Corrections
Credit bureaus sometimes make mistakes, and it’s possible for incorrect information to show up on your credit reports. For personal credit reports, there are protections in place that allow you to challenge any false information on your report. By law, the credit agency must respond to your request. With a business credit report, there are no such protections in place. The issuer is not required to respond to any challenges you make about your business credit report. This means if you discover errors in your report, you could have a much tougher time disputing your business credit report. For this reason, it’s a good idea to keep close tabs on your business credit reports and make sure all the information is accurate. This can make it easier to get the problem resolved.
Transfers
While your personal credit report stays with you for life, your business credit report will stay with the business. Even though that report is based on the transactions you made as owner, if you were to sell your business, the credit report would transfer to the new owner. For this reason, a business tends to be more valuable if its credit score is high.
Capacity
Capacity refers to the ability of a borrower to generate revenues to pay back a loan, and is something lenders consider when you apply for a small business loan. Businesses generally have much greater capacity for credit than individuals, no matter how good their personal credit. While personal loans are often limited to about $30,000, small businesses have access to loans up to $5 million. In order to maximize your company’s potential for funding, you’ll want to build and maintain your business credit, and not just your personal credit.
Pros and Cons of Keeping Personal and Business Credit Scores Separate
If you own a small business and don’t plan on taking out loans in the million dollar range, you may wonder if you really need to build two credit profiles. Here’s a look at the pros and cons of keeping your credit separate.
Pros
If your personal credit is weak, establishing good business credit can help qualify for loans you wouldn’t otherwise be able to get.
Many lenders require you to have both personal and business credit scores in order to qualify for financing.
Having business credit helps you avoid personal liability for your business’s debts.
Keeping business and personal finances separate makes bookkeeping easier.
Your business will look more professional when you pay for business expenses with dedicated business funds.
You may need business credit in order to get business insurance.
Cons
There are fewer legal protections for business credit, which can make it more difficult to get any mistakes on your credit report corrected.
If you sign a personal guarantee for a business loan, you’ll still be personally responsible, even if you have worked to establish separate business and personal credit.
Business credit cards often come with higher interest rates and fees than personal credit cards (though you may be able to find a low, or even a zero, introductory rate).
Tips for Keeping Personal and Business Credit Scores Separate
Here are some simple things you can do to separate business credit from personal credit.
Open Credit Lines With Vendors
Trade credit works a bit like a credit card — you can purchase office supplies and equipment on credit, then pay it off over one or more months. Each on-time payment will likely be reported to the business credit bureau(s), and that can contribute to building your company’s credit history and profile.
Choose Your Business Structure Carefully
If you operate your business as a sole proprietorship, there’s really no division between you and the business. In the eyes of the IRS and lenders, you are one and the same. Should your business not be able to pay off a loan, your personal assets could be seized to cover the debt.
Create a Business Credit File
You’re not automatically given a business credit profile. You can wait until (hopefully) a creditor reports your business credit activity to one of the bureaus, or you can be proactive and open a business credit file with one or all three of the business credit bureaus.Operating as a corporation or LLC creates a separate business entity. Your personal assets are protected, and, unless you sign a personal guarantee, they cannot be used to pay for the business debt.
Open a Separate Business Bank Account
If you’ve been using your personal checking account to cover business expenses, you may want to consider getting away from that practice. Opening a separate business checking account (using your business’s EIN) can help you build your business credit profile and will also make it easier to track business expenses in your accounting software.
Apply for a Small Loan
Even if you don’t need to take out financing right now, you may want to apply for a small loan to establish business credit. Lenders may look at your personal credit, annual business revenue, and time in business to make sure you qualify for a loan. Repaying that loan on time can help you start building a solid — and separate — business credit profile.
Get a Business Credit Card
If you use a business credit card (instead of your personal credit card) to pay business expenses, it will be easier to keep business and personal spending separate. And, if you pay at least the minimum (and ideally more) each month, it can help build credit for your business.
How Can Personal and Business Credit Affect Each Other?
Even if you keep your business and personal credit separate, there are times when they may overlap.For example, in some cases, your business credit cards can affect your personal credit. The reason is that some (though not all) business credit card issuers will report some of your business credit card activity to the consumer credit bureaus, and not just to the commercial credit bureaus.If your business credit card behavior makes its way to your personal credit report, it will affect your credit score in the same way as other credit cards do. On-time payment history and a low credit card balance will help your personal credit. Any missed payments could negatively impact your credit, as will a high credit utilization rate. If you’re concerned about this, you can ask the issuer if they report to the consumer credit bureaus before you apply for the card.In addition, applying for a business loan (or credit card) might temporarily impact your personal credit score. If the lender wants to look at your personal credit scores to determine whether to approve you or not, you may see the loan or credit card appear as a hard inquiry on your personal credit report, which could briefly depress your score.Finally, if you sign a personal guarantee for a business loan, you will be on the hook for making payments if your business can’t. If you then miss any of those payments or default on the loan, it will be reflected in your personal credit report.A good rule of thumb to keep in mind: If you can avoid giving your Social Security number (and hence, access to your personal credit history) for business purposes, that will help keep the two separate.
The Takeaway
For simplicity's sake, many small business owners use personal credit to run their business. However, doing this could put your personal finances at risk if your business is ever in trouble. Plus, many creditors and lenders these days don’t want to rely on personal credit alone when judging a business’s financial health — they want to see your business credit history as well.To some extent business and personal credit will overlap when you own your own business. But understanding how your business impacts your personal finances, and vise versa, can help you protect both types of credit. If you’re curious about what types of financing your business might qualify for, Lantern by SoFi can help. By filling out one simple form, you instantly get access to small business financing options matched to your small business’s needs and qualifications.
Frequently Asked Questions
Is business credit the same as personal credit?
Does business credit go on a personal credit report?
How can I build my business credit?
Do LLCs have credit scores?
Photo credit: iStock/anyaberkut
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About the Author
Susan Guillory
Su Guillory is a freelance business writer and expat coach. She’s written several business books and has been published on sites including Forbes, AllBusiness, and SoFi. She writes about business and personal credit, financial strategies, loans, and credit cards.
