Personal vs Business Credit: What’s the Difference?

Your credit score can make or break you in your financial life. It can determine what interest rate you pay, whether or not you can buy a home, sign a rental lease, get a credit card, or get a job. Similarly, your business credit can dictate the success or failure of your company.

What’s the difference between business and personal credit?

Personal credit is all about the numbers.

Your personal score follows you everywhere you go because it’s tied to your social security number. Three main reporting agencies will tabulate your score based on your credit history with a number between 300 and 850. This number is also referred to as your FICO score. The three agencies are Equifax, Experian, and Transunion. Each agency may report a slightly different number, but they should be similar.

Business credit is about history.

If you open a business, it will have its own separate credit score tied to your Employer Identification Number (EIN). There are many different agencies that provide your business credit score and they don’t all operate with the same calculation method. Generally the score will range from 0 to 100 and the higher the score, the better your credit. Maintaining a score of 80 or above is preferred. Business credit is scored based on the record of payments, length of time in business, and public records.

Never the twain shall meet.

When you’re just starting out, your business won’t have much of a credit history. You may be tempted to use your personal credit as a guarantee to back the business. This is a bad idea. If your business fails, you won’t only lose all the business assets but your personal assets as well. Your home, car, income, and savings can all be seized by creditors. Is financing your business worth declaring bankruptcy?

How to build business credit

First, keep your business and personal finances separate. If you are purchasing office supplies, don’t mingle the order with your children’s school supplies, as tempting as it may be. Keep ALL business and personal transactions separate.

Open a business checking account. You’ll use your EIN to open the account, not your personal social security number. This account will be the source for all payments out of the business. You can get a debit card to make payments until you get approval for a business credit card.

Apply for a business credit card. As long as you establish some payment history with your checking account, you should be approved for a credit card with a small credit limit. As you use the card and pay it off every month, your credit will grow and your limit will increase.

Use vendors to your advantage. Ask vendors to extend credit to you and be vigilant about repaying them. As you build a history with vendors, use that to forge new relationships and establish more credit. Work with vendors that report to credit bureaus so you’re taking advantage of the history you’re building. You may need to file your own credit report if vendors aren’t doing it for you.

Apply for a small business loan. In the early stages of business, you often need capital to grow. Rather than seeking out an investor and possibly losing equity in your company, try applying for a small business loan. As long as the repayment terms are favorable, you’ll get to keep your company and build your credit at the same time.

Building a good business credit profile takes time and effort. Late and missed payments will negatively affect your score, so put your finances in the hands of an accounting firm that will improve your score through accuracy. Prestige Bookkeeping is the partner your business needs to build a solid credit history and a bright future.

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