For most of the people in general, personal credit is related to one’s history of financial spending. However, for business owners, there is also something called business credit which is related to the history of your spendings from your business.
The difference between your business credit and personal credit can be a little tricky, especially if you are the sole proprietor. Therefore, it is essential that you understand the clear differences between your business and personal finances as properly as possible.
This must-have generated some curiosity on how do business and personal credit interact with each other? Does personal credit affect business credit or vice versa? For better understanding and right financial decisions, let’s take a look at the differences between both the credits and their relation with each other.
Differences: Personal Credit Vs. Business Credit
Even though both personal and business credits are inter-linked for small business owners, they are, still quite different. Both the credit types explain the different financial spending histories.
Personal credit is linked with your SSN ( Social Security Number) and is based on one’s spending history, which means credit extending for personal work, like student loans, credit cards, etc. Your credit profile is registered with three credit bureau entities Experian, Trans-union, and Equifax.
On the other hand, your business credit is linked with EIN ( Employer Identification Number ) or TID ( Tax ID Number), which is how the government agencies find your business for taxation related purposes.
The sole proprietor would require EIN for establishing business credit, but not for taxes. Equifax and Experian also offer business credit report services. Dun & Bradstreet is the best and the largest known credit services available for the business owners.
Another difference between personal and business credit is the relevancy of legal protections. Personal credit entitles you to receive legal protection if you find any suspicious transaction your credit report. You can get the wrong entries removed from the report as per the fair credit reporting laws.
There are so such laws applicable to business credit. Even though you can report entries on business credit reports, but issuers are not obligated to revert legally. Therefore, it is suggested that you should manage your businesses very carefully and monitor business credit from time to time.
Differences: Personal vs. Business Credit Scores
Now that you are aware of the basic difference between personal and business credit, there is also a separation between the respective credit scores showcasing your creditworthiness.
You might have noticed that your personal credit is highlighted by a number that helps lenders see your credit history and eligibilty. It is a numerical summary ranging from 300 to 850. Higher the credit score, better is your creditworthiness. The most commonly used system of personal credit scoring is FICO that is based on the credit reports containing information such as amount owed, payment history, type of credits, credit history, and new credit. The lenders and banks use your credit score to find out your eligibility for credit with low interest.
However, the business credit score is more of a numerical measurement to determine you and your business’s creditworthiness. The score ranges between 1 to 100, which means higher the score, better your chances of getting credit from lenders and other financing companies. The factors determining your business credit scores include payment history, utilization ration, business size, credit history duration, industry risk, etc.
Personal Credit & Business Credit: How Are They Connected?
After a brief learning of differences between Personal and Business credit, let’s learn about how are they related to one another in different scenarios.
Can a Sole Proprietor make use of Personal Credit?
For micro-business owners, single-member LLC, and sole proprietor, personal and business credit are often connected. Even though it’s ok to use personal credit for your business to conveniently manage your transactions at one place, but should you ever run into any financial loses, you will end up with you open yourself for personal financial risk too.
Your business credit will be connected to your social security number if you do not apply for EIN. That’s why it is better to get Tax ID or EIN to separate both the credit types. To avoid legal liabilities, it’s recommended to separate business and personal finances.
Is Business Credit Based on Personal Credit?
The answer is NO. Both the credit types are different. However, yes, there are situations when your personal credit can influence and determines your eligibility to receive business credit. For business credit cards and small business loans, your personal credit score and history will heavily influence your eligibility to get approval.
To secure small business loans, you need a qualifying credit score of a minimum 650. In the beginning, the lenders will use your personal credit to provide you the business credit, and once your company establishes and expands eventually, you can apply for EIN number that will help them see your good business credit in case you require more funding.
How Does Personal Credit Affect Business Credit?
Again the situation is similar to before because your personal credit does affect your business credit in different situations. For business owners, credit is an important tool that helps the business grow more. When applying for credit, your business cannot stand alone and hence, require a starting push from personal credit which can either hinder or improve your chances of getting business credit approval.
For instance, while applying for a business credit card, the bank will seek your personal credit. In case you have a bad credit score, the bank will deny the business credit card, and hence, lowering your chance to build your business credit. That’s why you need to ensure that your personal credit score is in good standing so that you can use it to help your business grow its separate business credit. If you have a good personal credit score and history, you will be eligible to receive better interest rates and loan term.
How Does Business Credit Affect Personal Credit?
While we have been emphasizing on the differences between business and personal credit, they do impact your business and vice versa equally. There are different ways of how your business credit may affect your personal credit. In case you use a business credit card, it would require you to sign a personal guarantee. In such a situation, you will be personally responsible for clearing the business credit, which can lead to problems in personal credit and finances.
Also, depending on the bank or the issuers, your business spendings through business credit card will also be reported, which can affect your personal credit scores. Therefore, you need to extra cautious towards your business credit activities, to avoid any negative effect on personal credit.
Separating Personal Credit from Business Credit
Small and new business owners often feel obligated to use personal guarantees and credit for business expenses. But, it could be risky, especially when your business grows every year. The bigger expenses can lead to bigger liabilities skewing your business’s (debt to income) ratio on the credit reports. This can lead to confusion about your business creditworthiness that your potential lenders may not understand.
Keeping your business and personal credit separate helps you maintain your individual identities for banks and other financial companies. Small business owners can still expect the lenders to look into their personal credit, but as the business expands and establishes, the lenders can easily rely on your business credit.
The best method to do so is by separating your personal finances from your personal finances. You can do that by creating checking account under your business name. This would work for saving your business funds and using them for expenses related to your business. It will help you manage your business finances, books, and to best ensure that your personal and business finances are separate for good. The right use of business credit card helps you track expenses and also gives your business credit score a good boost to make your business grow bigger and better.
By now, we are sure you can create a clear difference and complicated connection between personal and business credit. Therefore, instead of relying on Yes or No for “Does Business Credit Affect Your Personal Credit?”, it’s important to understand the basic differences and monitor the respective credit process.
Setting up a checking account for your business and using business credit card are two simple yet best methods to separate your business finances. This will mark your first step into creating a business credit history and qualify for more funding in the future.