Understanding Personal and Business Credit

5 min read • Apr 28, 2016 • Tyler Heaps

Your personal credit is the score you develop over time by maintaining responsible spending habits and meeting your financial obligations on time. Personal credit scores can range from 300 to 850 with creditors looking to see a minimum of 680 when considering offering you credit. A business credit score or commercial credit score, on the other hand, is the figure that indicates whether or not your company is a good channel to invest in or to do business with. These scores can range from 0 to 100 with 75 being considered an excellent rating.

As the sole owner of your enterprise, your personal score is closely connected with your business score and potential lenders are likely to make use of blended scoring tools to gauge your company’s creditworthiness. This is why; it is essential that you regularly assess both scores and take steps to maintain them.

When setting up your business, you’ll invest your personal capital into it. However, as it grows and needs more investment, you’ll look to banks and other creditors. To ensure the long-term growth and success of your small undertaking, one of the first steps you can take is to establish it as a distinct entity. By separating your personal credit from the business credit, you’re empowering it to create its own financial standing. And, a good score convinces loan providers that your enterprise is a viable investment.

Need for Separating Personal and Business Credit

Business CreditAside from raising finances easily, separating your personal and business identity is essential for a number of factors.

  • Should you take out business loans in the name of your company and are unable to pay them back, the creditor cannot attach your personal savings and assets to recover the investment.
  • When taking a loan for your enterprise, you’ll offer its assets and earnings as collateral for the loan. Since the due dates and conditions of the loans are clearly outlined, you’ll take decisions more carefully.
  • Working out your taxes and paying them correctly is easier since you’ll maintain different personal and business accounts. You can also save on taxes by making the appropriate deductions for company expenses.
  • Many proprietors are tempted to max out their credit cards when buying inputs and other equipment for their undertaking, and this can affect their personal credit scores. Demarcating your own and the company funds protects your financial standing.
  • You can prevent your personal assets from being attached as damages in case the business is sued.

Creating a Distinct Identity for Your Business

Check with your attorney, or town or state rules and regulations that will direct you on how to create a separate identity for your enterprise. Once it has its identity, you can begin building its creditworthiness. Typically, these are the steps you can take:

  • Create a legal identity by forming a limited liability company (LLC) or corporation.
  • Contact the IRS and get an EIN or Employer Identification Number. You’ll also need a DUNS business credit profile number that you can get at Dun & Bradstreet.
  • Register the physical address of the enterprise with the proper authority. You could also consider getting a distinct phone number for your undertaking.
  • Put together a professional business strategy and make sure you have the proper licenses for running your company.
  • Open a business checking account. Use it when paying the bills incurred by the enterprise and if you need to make purchases, use the debit card. Make sure you always have adequate funds in it and no checks are bounced.
  • Create and maintain financial records of all transactions including income and expenses, and balance sheets. Keep careful records and documents of the tax returns you file.
  • If you need to meet personal expenses, transfer the amount first into your own checking account. Doing this indicates that you’re paying yourself for the work you’re doing for the company.
  • Buy a credit card for your enterprise, but use it carefully. Take care not to use more than 30% of the limit and make payments regularly. Make it a point never to max out the card. Managing your company credit card efficiently is one of the best ways to build business credit.

Developing Business Credit

When developing your business credit scores, you must first understand how the different credit bureaus calculate scores and the criteria they choose. Conduct your operations by keeping these factors in mind and you should be able to build a good score. These determining factors can include:

  • Information from your suppliers and creditors on how you fulfill your obligations and meet due dates
  • Details of transactions conducted through banks
  • Any legal issues brought to state, county or local courts including lawsuits, judgments, liens
  • Accounts transferred to collection agencies
  • Information from credit card companies
  • Financial reports of your enterprise
  • Data collected from public records and state filing institutions
  • Information about registrations, bankruptcies and incorporations
  • Miscellaneous information received from independent channels

Maintaining Personal Credit

While conducting business, keep watch on your personal scores also. Remember that under special circumstances, the Fair Credit Reporting Act allows creditors to check the personal credit history of the company owner when assessing whether or not to offer small business loans and credit. Further, most banks and lenders may decline credit to enterprises whose owners have a FICO score of 640 or less. This is because owners facing financial issues in their personal life are very likely to project those issues into their business also.

Raising Finances

If you have low credit scores and don’t qualify for conventional forms of credit, you can make use of other sources of funds. By using and managing them responsibly, you can raise your company’s scores. For instance, look for funds from friends and families or peer-to-peer lending portals. You could try to get business-to-business, equipment or accounts receivables financing to raise the capital you need. Only ensure that you meet your commitments, so you creditors are encouraged to send favorable reports to the credit reporting agencies.

Thus, having a strong personal and business credit can be highly advantageous for the future growth of your company.

Tyler Heaps

Tyler is a member of the Lendio marketing team. He is passionate about digital marketing, small business, and helping small business owners succeed. Tyler is an outdoorsman and loves spending time with his family.