Separating business and personal credit can be tricky for small businesses, particularly when you yourself are your business. It’s generally recommended to keep your business and personal finances separate, and building business credit that’s separate from your personal credit is part of that process. There are instances where your personal and business credit may overlap though. If you’re applying for financing for your business and don’t have a long enough business history to qualify, the lender may take your personal credit into consideration.
The Difference Between Personal and Business Credit
Your personal credit is attached to your Social Security number, whereas your business credit is linked to your Employer Identification Number (EIN) or Tax ID Number. Your Tax ID Number is how the government recognizes your business for tax purposes. You can apply for an EIN online and receive one pretty quickly. While you don’t technically need one for tax purposes if you’re a sole proprietor, you should probably set up an EIN. You do need an EIN to establish business banking accounts in most cases, and you also need an EIN to establish business credit.
Your personal credit history is managed by three major credit bureaus; Equifax, Experian, and Transunion. Experian and Equifax also have business credit reporting services. Your personal and business profiles will be separate.
Dun & Bradstreet is the largest and most well-known reporting service for business credit, though there are others. If you have more than one business, you can have a separate business credit report for each, so long as you have separate EINs for those businesses.
Business vs Personal Credit Score
Personal credit is frequently consolidated into a singular credit score that helps creditors and lenders see your creditworthiness quickly. FICO is the most common way of scoring personal credit. There is no equivalent for businesses; each commercial credit bureau reports and scores business credit in its own way.
Generally, business credit scores consider fewer factors than personal credit scores.
The most important factors in scoring business credit are how your business pays its bills, how much debt your business carries, and the industry your business operates in. Improving your business’ credit score is often much easier than improving your personal credit score as well.
There are fewer legal protections for business credit, and consumer credit laws do not apply to businesses. Consumer credit laws allow you to dispute entries on your credit report and have faulty information corrected or removed; no such protections apply to business credit, making it much harder to deal with any issues. You can challenge discrepancies and errors with the bureau reporting them, but that bureau is under no obligation to respond to your request.
Do I need Business Credit?
There are instances where your business won’t be able to complete transactions without business credit. Financial institutions will use your business credit to determine whether or not to lend your business money. You’ll also need business credit to get business insurance. Without access to business credit and lines of credit, you may not be able to purchase the goods and services your business needs to operate.
In some cases, you can use your personal credit to obtain some of the above, but it’s best practice to keep business and personal credit separate whenever possible. The IRS has very strict rules regarding mixing of business and personal finances. Using personal finances to pay for business purchases makes bookkeeping much more complicated. Some believe that paying for business expenses with business funds is just an overall more professional way to conduct business.
Business credit can also be a factor in how your prospective or current customers perceive the risk related to doing business with you. There are situations where your business credit or risk score may be used as a gauge of whether to include or exclude you as a prospect, and it’s important to always understand “how you look” to your customers.
Most importantly, if you use personal credit to run your business, you put yourself and potentially your family at risk if your business experiences financial difficulties or fails. When you use your personal credit to run your business, you yourself become personally liable for that debt rather than your business. Creditors will come after you for repayment, not your business.
Six Ways to Establish Business Credit
- Select your business structure carefully. The best way to separate your business and personal accounting and assets is to do it legally. Instead of a sole proprietorship, consider removing yourself and forming a corporation or LLC.
- Open a business checking account. Use this account to pay your business’ bills and handle payroll (including paying yourself). If you’re incorporated, you’re required to have a business checking account. You’ll need an EIN to open the account.
- Apply for and use a business credit card. Pay business expenses with this card, not your personal credit card. This makes tracking your expenses much easier and helps you build credit for your business as you make payments on the card. If you don’t qualify for a business credit card, opt for a secured business credit card, which is backed by an amount of money you put down to guarantee you’ll pay.
- Ask for credit terms from vendors. Even if the limit is small to start with, getting credit terms from a vendor can help you build your business credit. Pay the bills on time and after several on-time payments, ask for your limit/term to be increased. Success with even one or two vendors can help establish your business credit and put you in a much better position when applying for loans or asking for credit terms with other vendors.
- Apply for a microloan. These very small loans can give you access to affordable capital, and are easier to qualify for than those from traditional lenders. Your payments on these loans will be reported to credit bureaus, which helps you build credit.
- Apply with bureaus. Equifax and Experian allow you to open a business credit file on your own, but Dun & Bradstreet require that you apply for a DUNS number.