Have you thought about your business credit or how it may affect your company’s viability? In many ways, business credit is similar to personal credit. You need strong personal credit to buy a house, get a loan, or apply for a credit card. Having a strong business credit file may improve your company’s chances of qualifying for business loans, receiving lower interest rates, and increasing cash flow. It may even help you negotiate better payment terms and attract new customers.
But what is business credit? What are the implications of separating your personal and business credit? How can you get started? Here, we answer some of the most commonly asked questions about personal versus business credit.
Is Business Credit Separate From Personal Credit?
Business credit and personal credit are two different things. A good personal credit score can help someone qualify for greater financial responsibility in their personal life, such as a mortgage or an auto loan. Business credit scores and ratings may help do the same thing for a company. But business credit reflects only the financial health of the business, not that of the owner’s personal finances.
What does this mean? New businesses usually do not have the significant credit history that an owner might personally. However, a new business can take the first step to establishing its business credit file with Dun & Bradstreet simply by requesting a Dun & Bradstreet D‑U‑N‑S® Number. And a company may already have a business credit file if Dun & Bradstreet has come across it in its data gathering process and has confirmation that the business exists. This video explains the process:
As a new business begins to establish relationships with other companies, these relationships can impact its business credit and, by extension, impact others’ view of that business. Anyone can request a business credit report or monitor a company’s credit file, so other businesses may already be accessing information in your company’s file, even if you didn’t know you had one.
While you may have stellar personal credit, it may not always be viewed as an accurate indication of how you run your business. A strong business credit file may help you prove your business’s creditworthiness, separate from your own.
Why Should I Separate My Personal Credit from My Business Credit?
New business owners may feel obligated to use their personal credit and personal guarantees to cover business expenses. However, there can be serious risks to tying your personal credit to your business credit. The risk of using personal guarantees tends to grow as your business grows. With growth comes bigger expenses and, in turn, greater personal liabilities. Using personal credit to cover business expenses can also skew your company’s debt-to-income ratio on its financial statements, making it more difficult for lenders and potential partners to get a clear picture of your business’s creditworthiness.
And because your personal credit score can take a hit each time a hard report is pulled, having it pulled by lots of banks or other companies looking to do business with you might not be ideal. But if your personal and business credit are kept separate, your personal credit may remain untouched, as there is no negative effect on your personal credit from someone checking only your business credit file. That said, many startup and microbusiness owners should still expect lenders to request their personal credit as well – as your company grows and becomes more established, the likelihood that lenders and potential partners can rely on your business credit alone may increase.
Additionally, if you only use personal credit to cover business expenses, other companies may access your “incomplete” business credit file and get the wrong impression about your business. Both you and your business can benefit from separating your personal and business credit.
Does Business Credit Affect My Personal Credit?
While it is important to separate your personal and business credit as much as possible, they may both impact your business. In particular, if you are a sole proprietor, your personal credit may have a greater impact on your business. If you are asked for your Social Security number on an application for a credit card or a lease, chances are your personal credit will be reviewed. However, it is very rare that your business scores and ratings will have a great impact on your personal credit scores and opportunities. If you are asked for only your EIN or your D‑U‑N‑S® Number on an application, it is likely that only your business credit will be evaluated.
How to Build Business Credit
Just as with building personal credit, the earlier you start building your business credit, the better. You wouldn’t want to open your first personal credit account the same day you want to buy a house. Similarly, with business credit you want to start small and build it over time.
- Register your business with the major credit reporting agencies. With Dun & Bradstreet, you can accomplish this simply by applying for a Dun & Bradstreet D‑U‑N‑S® Number.
- Open a business bank account and begin to use it regularly for business expenses.
- Ask your vendors, suppliers, or manufacturers to submit payment experiences on your behalf to the business credit reporting agencies. In the case of Dun & Bradstreet, these payment experiences can impact your Dun & Bradstreet scores and ratings. Be sure to pay your vendors on time or early to build positive business relationships, both because it earns goodwill and because their payment experiences could impact your business credit scores and ratings.
- Check your business credit file regularly, and submit corrections to any errors. You can even dispute payment experiences in your file that you believe to be inaccurate.
- Going forward, apply for financing in the business’s name. Whether it’s a line of credit or a loan, try to avoid using your personal credit as much as possible.
Building Business Credit with Bad Personal Credit
Business and personal credit files are separate, so it’s possible to establish strong credibility for a company even if your personal credit score is low. The basics of building business credit as outlined above are still valid. However, business owners with bad personal credit could also consider doing the following:
- Choose the right business structure. Lenders, insurers, and other partners will likely view your personal credit score when making decisions about the company’s credibility. If you have bad personal credit, consider incorporating to set the business up as a separate legal entity.
- Pay bills and invoices with company checks or credit cards. Dun & Bradstreet only considers payments made by the business when collecting business credit data. Note that some business credit cards are tied to the applicant’s personal credit file; you’ll want to seek out those that are issued to the business.
- Make on-time payments. Past payment experiences are one of the factors that go into calculating a business’s credit scores and ratings. Paying your company’s bills early or by the due date can demonstrate financial responsibility and keep you from falling into the same bad habits that may have damaged your personal credit.
When it comes to building business credit with bad personal credit, keeping a company’s finances and legal identity distinct from your own is key.
Considerations for Small Businesses
Building business credit has many positive implications besides just protecting yourself from personal liability. For example, business credit may be required or advantageous when:
- Requesting higher trade credit limits from suppliers
- Requesting lower premiums on insurance policies
- Negotiating lease terms on equipment and real estate
- Negotiating freight terms
- Obtaining payroll credit
- Winning contracts for national distribution from a large chain
- Bidding on more lucrative contracts
- Seeking line-of-credit increases
- Seeking more favorable interest rates on loans from banks
- Applying for funds to cover an unexpected emergency
Ideally, small business owners would have strong personal and business credit. Paying bills on time (or early, when you can) and keeping lines of communication open with your lenders and vendors can go a long way toward helping with both.