As a business owner, you’re probably familiar with personal credit – the capacity to borrow cash or access goods and services, determined by your debt repayment history. And you probably understand that having good credit, or being “creditworthy,” can make it easier to gain access to more credit when needed.
But are you familiar with business credit?
In some ways, business credit is similar to personal credit. For example, business credit reflects a company’s creditworthiness and can play a valuable role in obtaining financing, opening a business credit card, or even doing business with suppliers. But as a business owner, understanding the differences between personal credit and business credit – and why it makes sense to keep them separate – can go a long way toward securing a sound financial future.
Business Credit vs. Personal Credit: What’s the Difference?
Both business credit and personal credit rely on historical financial data to indicate a business or individual’s creditworthiness, or how reliably they have managed debt like loans or credit cards. And for businesses and individuals alike, good credit can make it easier to obtain more favorable interest rates, credit limits, and loan terms.
Still, business credit and personal credit are quite different. Here’s how:
- Social Security Number vs. EIN: Personal credit profiles are linked to an individual’s Social Security number. Business credit profiles are linked to employer identification numbers, or EINs, issued by the IRS. It’s important to note that businesses registered as sole proprietorships do not need an EIN for taxes but can still obtain an EIN to establish business credit.
- What Affects Personal vs. Business Credit: Personal credit reports and scores are generally shaped by payment habits, credit card usage, loan usage, and other types of credit. Business credit history factors in the same type of financial information, but might also include vendor credit history, historical data like public record information, business size, and payment performance in the context of the business’s industry.
- How Credit is Reported: Personal credit is reported by the three leading credit reporting agencies: Equifax, Experian, and TransUnion. For businesses, Equifax and Experian both offer business credit reporting services, compiling data from outside sources to assess a business’s credit history. Business credit can also be reported by specific credit reporting services that only deal with businesses, such as Dun & Bradstreet (D&B). To report business credit with D&B, businesses must register to obtain a free nine-digit D&B DUNS number.
- How Credit Scores are Reported: Personal credit scores are determined by FICO or VantageScore and range between 300 and 850 – the higher the number the more creditworthy the individual. Business credit scores are expressed differently and vary based on the credit reporting organization and index used. Equifax, Experian, and D&B all produce business credit scores in addition to credit reports, and usually range between 0 and 100. Meanwhile, the FICO Small Business Scoring Service (SBSS) specifically assesses small business credit and ranges from 0 to 300. Again, the higher the number, the more creditworthy the business.
How to Establish Business Credit
While there’s no law requiring businesses to establish business credit, there are practical reasons to do so. For example, a good business credit history can make it easier to obtain financing for major purchases like new equipment or real estate, with better interest rates and terms – all without needing a large stockpile of cash. Good business credit is also likely to make the business more attractive for potential business partners or business insurance providers.
To establish and build business credit, consider these tips:
- Get an EIN. Even if you’re a sole proprietor and do not need an EIN to operate your business, it’s a good idea to obtain one. An EIN is necessary to establish a business credit profile, to help keep personal and business credit separate, and to open a business bank account.
- Ensure Lenders Report Your Payment History. If your account information isn’t being reported to at least one of the four main business credit reporting agencies, your efforts to make on-time payments might go unnoticed. Be sure lenders, creditors, and even suppliers report to credit bureaus if possible.
- Establish credit accounts with suppliers. Even if you can pay cash, establishing credit accounts with vendors can help you build business credit – if the vendors report payments to business credit reporting agencies.
- Open a business credit card. Using a business credit card is a tried-and-true way to establish and build business credit, as long as it’s used responsibly. If you’re unable to qualify for a business credit card, consider opening a secured business credit card instead of relying on a personal credit card. With secured credit cards, account owners deposit funds into the account as a guarantee that any charges made will be covered.
- Obtain a small loan. Most businesses will need a loan from time to time. Not only are they a useful means of financing, but responsible repayments can be another effective way to build business credit.
- Be responsible with credit. Always paying on time indicates that you are responsible with credit and can effectively manage debt. A history of late payments can hurt a business’s credit rating, which can in turn negatively affect its ability to obtain financing or do business with suppliers.
It’s a Good Idea to Keep Business and Personal Credit Separate
Financial experts strongly advise businesses keep business credit separate from personal credit as much as possible. On one level, it makes bookkeeping and tax season much easier. But there’s much more to it than that. For example, keeping business and personal credit separate can help business owners:
- Protect personal assets. If a business is ever sued, personal assets can be at risk if not kept separate from business assets.
- Protect personal credit. When kept separate, business credit will not affect personal credit and vice versa. This means that if your business faces some financial challenges, you can avoid damaging your personal credit history – or maxing out your personal credit limit.
- Access more credit. Business owners generally need far more credit than the average consumer, making it difficult to run a growing business with personal credit alone. Thus, businesses can usually qualify for higher loans and higher credit limits.