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What is the difference between personal credit and business credit?
When it comes to small business, especially sole proprietorships, it’s easy to get confused between personal and business credit. Odds are, you may not have even heard of business credit before deciding to start a business! There is definitely a bit of grey area, and even some places where personal credit and business credit overlap. Not to worry — we’re going to clear all that up.
To start, all you need to know is that personal and business credit scores are separate and distinct, starting with how they are tracked and calculated. Let’s take a look at some of the key differences between the two.
| Personal Credit | Business Credit | |
|---|---|---|
| Identification | Tied to your Social Security Number (SSN) | Tied to your Employee Identification Number (EIN) |
| History Used | Personal financial history | Business financial history |
| Factors Considered in Credit Score | Payment history, credit utilization, credit history, new credit, and hard inquiries | Payment history, credit utilization, credit history, demographic details, public records |
| Score Range | 300 - 850 | 0 - 100 |
| Major Credit Bureaus | TransUnion, Equifax, and Experian | Equifax, Experian, and Dun & Bradstreet |
Identification
Personal credit is established in your name and Social Security Number (SSN). Business credit, on the other hand, is established in your business entity’s name as well as Employment Identification Number (EIN). This allows credit bureaus to tie your business’s financial history back to your business, while your personal credit history gets tracked back to you as an individual.
Factors considered in personal vs. business credit scores
As stated above, personal credit is calculated based on your financial history. The two biggest factors that affect a personal credit score are payment history (35%) and credit utilization (30%). Other contributing factors include the length of credit history (ie, how long you’ve been using credit) and how many lines of credit you have open.
Business credit, on the other hand, is calculated based on your business’s financial history. Similar factors as with personal credit apply, such as payment history, credit utilization, and credit history. That said, there are also unique considerations that business credit bureaus take into account when calculating your business credit score, such as company size and industry risk. Any public record on your business such as bankruptcy and liens will be reviewed as well.
Score range and major credit bureaus for personal vs. business credit
The major credit bureaus that provide personal credit scores are TransUnion, Equifax, and Experian. While there are differences in the ways each bureau calculates credit scores, they generally fall within the range of 300 to 850. A credit score of 760 is considered very good, and can help you attain better interest rates and payment terms on credit cards, mortgages, and other types of loans.
When it comes to business credit, the major credit bureaus are Equifax, Experian, and Dun & Bradstreet. Their scores fall within a range of 0 to 100 for the most part, though different scores have different ranges. Generally, a business credit score of 80 or above will unlock funding perks such as larger credit lines and more favorable contract terms.
Personal credit vs. business credit for sole proprietorships
As a sole proprietor, the lines between your business finances and personal finances are a bit more blurred. Technically, you can use your personal credit to get personal financing that you then use for your business. However, it’s best practice to keep the two separate, and to establish business credit apart from your personal credit. Not only that, but financing for businesses can often come in larger amounts with lower interest rates, better payback terms, and in some cases (like with SBA loans), decreased personal liability.
To do this, you will need to request an EIN. Sole proprietorships can be incorporated without one, but moving forward without this number will end up tying your business’s financial history to your SSN, and therefore, personal financial history. In doing so, you will end up building your personal credit rather than your business credit. This can end up barring you from business-specific funding later down the line.
Does business credit affect personal credit?
Generally speaking, business credit should not affect personal credit, as they are separate and distinct from one another. That said, some business financing products, such as business credit cards, do report usage to both business and personal credit bureaus. For example, American Express reports to consumer credit bureaus if your account becomes delinquent. You’ll have to check with each lending product to see if and under what circumstances they report to consumer credit bureaus.
Even here, however, it’s worth noting that technically, your business credit does not affect your personal credit: rather, your use of business credit products can affect your personal credit score under certain conditions. It’s a small but important distinction!
Why do lenders ask for a FICO score?
Lenders are always assessing the “risk” of lending to a small business. Risk is short for financial risk, which is essentially the possibility that the lender could lose money on any given financial product, such as a loan. The way that lenders hedge against the risk of losing money is by interest rates (the higher the interest rate, the higher their perceived risk of you as a borrower), collatoralizing the loan (very common with equipment financing, where a lender would collect the equipment in case of default), and by securing a personal guarantee.
The last one on that list is where your FICO score comes in. Part of what goes into a personal guarantee is your personal credit score. The more creditworthy you are as an individual, the more comfortable that a lender will feel when lending you money — if your business were to default on a given loan, they figure, then you as the business owner should be able to repay on your business’s behalf. When a lender requires your FICO score as part of a loan application, any hard inquiries they perform will temporarily affect your personal credit.
Should you use personal credit for business?
We don’t recommend it. As stated, it’s good practice to keep personal credit and business credit as separate as possible. This allows you to access larger credit lines and protect yourself from personal liability of business debts.
Plus, if you have employees, you’re going to want to hand them a business credit card to make purchases with rather than a personal credit card. Otherwise, the paperwork associated with reimbursing them can get messy and tedious. Worst of all, that purchase on your personal card won’t help you build business credit!
How to build business credit even with bad personal credit
Since the two credit histories are separate, it’s fairly straightforward to build business credit even if you have bad personal credit. So long as you follow the best practices for building business credit, you should be well on your way to a good or even excellent credit score. Here are some quick tips:
- Take out business financing before you need it. The easiest way to do this is with a business credit card.
- Ask your vendors, suppliers, and anyone else you have an open account with to report your payments to business credit reporting agencies.
- Aim to keep your credit utilization at 30% or below.
- Be sure to pay all your bills on time.
- Dispute any errors with the credit bureau if you see them on your credit report.
- Avoid applying for new credit lines too frequently, as many hard inquiries can both bring down your credit and serve as a red flag for lenders.
Lastly, avoid allowing any business financial obligations to go unpaid or otherwise be put into bad standing. As is the case with some financial products, such as credit cards, derogatory marks can get reported to consumer credit bureaus. This can in turn lower your personal credit score. On the flip side, sometimes you can request that business credit cards report to your personal credit, allowing you to build both your personal and business credit at the same time.
What business credit can do for you
Having strong business credit can go a long way in helping you obtain larger loan amounts at better rates and favorable payment terms. It can also help you get special deals with suppliers if you need to purchase equipment, stock inventory, or buy supplies in bulk. Finally, with a very strong business credit history, lenders can sometimes be convinced to skip a personal credit check altogether. All in all, having excellent business credit is only a good thing when it comes to financing your small business.
Last word on personal credit vs. business credit
As you can see, personal and business credit are measured separately as two distinct credit histories. Though at times they can and do overlap with one another, for the most part, you can take steps to protect and build each one separately. Building business credit is essential to obtaining favorable credit and financing terms that can save you money as you invest in your small business. Be sure to take the necessary steps to start building yours!
