Difference Between Personal and Business Credit
What is the difference between personal and business credit?
Your personal credit score and business credit score are two separate but related numbers that tell lenders how creditworthy you, or your business, are.
But because credit bureaus use similar metrics to measure both scores, and because personal credit is occasionally used in lieu of business credit (for sole proprietors), there is some confusion as to how to build and maintain each form of credit separately.
What is personal credit?
When you first take out a line of credit as an individual—your first credit card for example—you begin your personal credit history and credit score. This score is linked to your Social Security Number.
From then on, your score reflects your personal financial history.
If you always pay your bills on time, don’t use too much of your available credit at once, and avoid negative items like foreclosures and charge offs, you’ll develop a good personal credit score, also known as a FICO score.
What is business credit?
When you start a business and begin to file business taxes, you’ll need an Employee Identification Number, or EIN.
This unique number is often required for business owners—and even when it’s not required, it’s still a good idea to get one—and obtaining one starts your business’s financial history and thus your business credit score.
Bureaus like Experian and Equifax, which also report personal credit scores, and Dun & Bradstreet, which calculates business credit scores only, can produce business credit reports for you.
Business credit score is on a scale from 1-100, with 100 being the highest.
Businesses also have a greater capacity for credit.
The best business loans can be for as much as millions of dollars, repaid over many years.
Personal loans usually max out at about $30,000 or so. In order to maximize your potential for funding, you’ll want to build and maintain your business credit.
Why you should keep personal and business credit separate
In many instances, an EIN is required for business tax purposes, which means you’ll start to build a business credit report right away.
An EIN isn’t required for all businesses, like when you’re a sole proprietor or single-member LLC with no employees. At that point, your personal credit would instead reflect your business’s financial history.
Keeping your business and personal finances separate, however, is a good business practice.
It makes filing your taxes easier, builds your capacity for credit, and makes scaling up (hiring employees, applying for business loans for expansion) easier when the time comes.
You’ll also avoid personal liability for your business’s debts.
Conclusion
Maintaining separation between personal and business credit is important, especially when it comes to getting the funding you need for your business and protecting yourself from liability.
Get qualified for business funding today by visiting our funding platform ROK Financial here.