Editor’s note: Lantern by SoFi seeks to provide content that is objective, independent and accurate. Writers are separate from our business operation and do not receive direct compensation from advertisers or partners. Read more about our Editorial Guidelines and How We Make Money.
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 federal 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 may impact your business credit report and score.You actually have three primary business credit risk scores:
Dun & Bradstreet® PAYDEX® Score
Equifax® Commercial Risk Scores and Indicators
Experian® Intelliscore Plus℠
Every business credit scoring model has its own algorithm for calculating your business credit score. Business credit bureaus will typically look at your company’s:
There are three nationwide consumer reporting agencies that can provide you with your personal credit report:
Equifax
Experian
TransUnion®
Your FICO® Score and VantageScore® is generally based on the following information in your personal credit report:
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 bad 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, good credit scores may indicate you know how to manage your money, which means the risk in lending to your business is low.Here are some of the typical business credit scores:
Dun & Bradstreet PAYDEX Score. This business credit score ranges from 1 to 100, where a higher number represents a greater likelihood that a business will pay its debts on time.
Equifax Payment Index (PI) Score. This business credit score ranges from 0 to 100, with zero being the best score reflecting excellent habits of paying bills when due and 100 being the absolute worst PI score.
Experian Intelliscore Plus V3. This business credit score ranges from 300–850, where a higher number represents a lower risk of severe delinquency or bankruptcy in the next 24 months.
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 credit 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 300–850 range, with 850 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 setbacks (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 report (which occurs when you apply for a new source of credit), your score will likely be on the lower end.
Why You Need Business Credit
Establishing business credit can help you access capital for growing your small or medium-sized enterprise. It can be difficult to borrow small business loans if you lack business credit vs. personal credit.You may need business credit if you’re looking to separate your personal finances from your commercial finances. Having business credit helps you avoid personal liability for your business’s debts.Here are some points to keep in mind:
Key Differences Between Business and Personal Credit
In many ways, business credit vs. personal credit scoring models 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 personal vs. business credit 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 statutory protections in place. The issuer is generally 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. Lenders may offer online personal loans up to $100K and small business 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.The below table highlights some of the differences between business credit vs. personal credit:
You have consumer protection rights governed by the FCRA
Credit reports stay with the business
Credit reports stay with you for life
These credit reports are open to the public
FCRA restrictions prevent the general public from accessing your personal credit report
Lenders may offer small business loans up to $5 million
Lenders may offer personal loans up to $100K
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 business credit vs. personal credit separate:
Pros
If your personal credit is weak, establishing good business credit can help you 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
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 card delinquencies can damage your personal credit scores
6 Tips for Keeping Personal and Business Credit Scores Separate
Here are some simple things you can do to separate business credit from personal credit:
1. 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.
2. 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.
3. 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.
4. 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.
5. 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.
6. 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. 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.
Find Out What Kind of Financing Your Business Credit Score Gives You Access to
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.Your business and personal credit profile may overlap as a small business owner. But understanding how your business impacts your personal finances, and vice 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. Just fill out a simple form and find the right financing for your business.Lantern can help you find fast funding for your small or medium-sized enterprise.
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?
Is it better to build business credit or personal credit?
Photo credit: iStock/anyaberkut
LCSB0623010
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.
