By kostandina
If you are a new small business owner, chances are you haven’t built up any business credit yet so you are running the show using your personal credit. While this may seem like a good option, it could potentially get you into trouble if you run into problems with your business.
Of course, these two forms of credit are measured using similar metrics, so it can be confusing to tell the difference between them and to know how to protect and manage them both. In this article, we will discuss the main differences between them, what affects each of them, and how to monitor, evaluate, and maintain them.
In a nutshell, your personal credit reflects the payment behaviors used in your personal life, and your business credit reflects the payment behaviors done in the name of your company. However, when you look closer at the two types of credit, you will see that they act differently.
Your personal credit history begins when you take out your first line of credit in your name as an individual person. For example, it might be from when you took out your first loan to help pay for college or when you opened your first credit card to start collecting miles or points. This starts off the process of building your personal credit score (most commonly a FICO score), which is linked to your Social Security Number.
As you start making purchases using your personal credit lines, you will begin to build either a good or bad credit history. For example, if you always pay your bills on time, don’t use all of your available credit too quickly, and avoid things like foreclosures, you will create a good personal credit score for yourself.
If, however, you fail to make your payments on time and you find yourself unable to keep up with your expenses, you will eventually end up with a low FICO score.
Even if you are the sole proprietor of your business, your business credit begins when you start your company and file business taxes. Here, you will use your Employee Identification Number (EIN), which will differentiate this type of credit from the one that looks at your SSN.
From the moment you open your business, all lines of credit associated with this EIN will start creating your business credit history. This means that all purchases, expenses, and tax breaks made on behalf of your company will only add or subtract from your business credit score.
Almost everyone living in modern society has a personal credit history. Even if you don’t have a credit card, most likely you have taken out some sort of loan or applied for even a student card. However, business credit is something that only applies if you own a business, so not everyone has a business credit history.
Surprisingly, many business owners know very little about the options available for having business credit, leading them to use their own personal credit for their business. Even if you don’t have a whole company set up, you can apply for a business card simply by earning a bit of money independently.
While there are some similar factors credit bureaus look at when determining both your personal and business credit, there are some major differences that are unique to the business world. There are three different categories to look at when creating your credit score.
This one is essentially the same for both your business and personal credit score. Credit bureaus will evaluate your payment patterns (i.e. how often you make payments on time or how many late penalties you typically receive), any outstanding balances, how much you are actually utilizing your credit, etc.
This section is also used to determine both personal and business credit scores, however, the details will differ slightly. As these records are public information, credit bureaus will look to see if you’ve personally had any bankruptcies, judgments (unanswered court summons and/or failed payments), or liens, as well as if any of these has occurred to your business.
This is where the factors start to differ from those that determine your personal credit score. Credit bureaus will look at details about your company and the industry in which it resides to help create your score. Factors like how much time you’ve been in business, the size of your company, how many employees are on your payroll, and which classification your industry is in, among others, will play a big role in determining your business credit score.
Much like with your personal credit score, there are many ways to improve your business credit score as well.
Although you are, of course, the same person you are in your individual life as you are in your business activities, your credit should be kept completely separate. Not only can a big business failure have detrimental effects on your personal credit (which can significantly affect big life decisions such as buying a home or a car), but many creditors now are moving away from relying only on your personal credit to determine a business’s financial status.
Creditors are starting to understand that someone’s personal credit history is not a good predictor of a business’s behavior, so these companies are starting to use a blended approach, looking at both personal and business factors to determine risk.
As a business owner, and an individual, it is imperative to keep track of both types of credit and make sure to maintain a healthy financial status in all aspects of your life.
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