Personal Credit vs. Business Credit

When you are a business owner, it is important to understand the difference between your personal credit score and business credit score. They each contain different information, so the scores are not necessarily correlated. When you apply for a loan, lenders will review your personal credit before extending business credit. On the surface, personal credit relates to your personal financial history and the other to your business’s financial history. Here we will explain the rundown of the difference between personal and business credit and how they relate to each other.

Personal Credit

Your personal credit is developed by being responsible and meeting your financial obligations on time and having good spending habits. A personal credit score can range from 300 to 850 and lenders typically prefer to see a score of at least 680 when considering offering you credit. This score is called your FICO score, a method used to score personal credit. Your personal credit is based on your personal spending history and tied to your social security number.

Ways to Boost Your Personal Credit

  • Automate credit payments
  • Adjust your due dates
  • Aim for a credit utilization ratio of 30%
  • Handle new credit carefully
  • Examine your credit report periodically

Business Credit

Business credit is tied to your employer identification number (EIN) or business tax ID number. If you do not have an EIN for your business, make sure to apply for one online. This number lets the government recognize your business for tax purposes. If you are a sole proprietorship or a single-member LLC, you do not need an EIN. If this is your case, then your business credit is tied to personal credit. Otherwise, business credit is separate from personal credit.

A high business credit score will improve your chances of being approved for a business loan and receive good rates and terms. A low score can mean high interest rates and can even prevent you from being eligible from borrowing at all.

Ways to Boost Your Business Score

  • Establish credit lines with vendors and suppliers
  • Make timely payments
  • Request your business credit report to see where and how you can improve your score
  • Check your report for any errors

Why You Need Business Credit

If your business does not have business credit, then you will not be able to complete business transactions. Lenders look at a business’s credit history when deciding whether to approve you for the loan or not. You also need business credit to get business insurance. You will not be able to buy goods and services without having business credit.

You might be wondering why you just cannot use personal credit but if you use personal credit to run your business you and your family can be at risk if there is any money trouble or if your business fails. If this happens then creditors will be after you because you are liable for the expenses incurred by your business. It is recommended that you keep personal and business separate.

When it comes to taxes, it will be easier to do them if they are separate from your personal credit. You will also be able to save on taxes by making the appropriate deductions for company expenses.

How to Build Business Credit

The earlier you start to build your business credit, the better. In order to start considering the following the steps:

  • Register your business with credit reporting agencies such as Dun & Bradstreet.
  • Open a business bank account to use for business expenses.
  • Ask the vendors, suppliers, or manufacturers you work with to submit payment experiences on your behalf to the business credit reporting agencies.
  • Apply for financing in the business’s name and avoid using your personal credit as much as possible.

Conclusion

As you can see, there is quite the difference between personal credit and business credit. It is important to remember the distinction between the two types and monitor them occasionally. By setting up a business bank account and using a business credit card, you will be able to keep your finances separate and establish your business’s credit history making it easier to get funding in the future.