Can Your Personal Credit Score Affect Your Small Business?
Starting your own business often costs quite a bit of money — and you may have to borrow some to get things off the ground. In the beginning, you may have to use your personal credit score to help establish your creditworthiness with potential lenders, even if you intend to borrow with business credit.
However, it’s important to keep your business and personal finances separate and develop a business credit profile. Eventually, lenders will rely on your business credit score to decide whether to approve loans or other credit applications, and your personal credit rating will no longer affect your business credit opportunities.
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How are business credit and personal credit different?
A personal credit score tracks your personal credit history by calculating a number based on various factors — whether you make payments on time, how much debt you carry and so on. Business credit scores are similar but track the business’s financial history instead.
As long as you keep your business and personal finances separate, the two scores will measure different things.
| Business credit | Personal credit | |
|---|---|---|
| Common credit scoring models | PAYDEX Score, Intelliscore Plus, FICO SBSS | FICO, VantageScore |
| Score ranges | 0-100, 0-300 (SBSS only) | 300-850 |
| Reporting agencies | Dun & Bradstreet, Equifax, Experian | Equifax, Experian, TransUnion |
| Reference number | Employer Identification Number (EIN) | Social Security Number (SSN) |
| Common types of credit | Business loans, lines of credit, business credit cards | Mortgages, auto loans, personal credit cards |
Does personal credit affect business credit?
When starting a new venture, you should register the business, apply for an Employer Identification Number (EIN) and open a business bank account with your EIN. Keeping your business’s finances separate from your own finances protects you from risk, makes it easier to do your taxes and allows you to secure financing for your business.
Depending on your business model and cash needs, you may need to borrow money to get the business off the ground. Some businesses put everyday purchases on a business credit card, open a line of credit to ensure consistent cash flow or secure larger loans for capital investments. In many cases, when you apply for these types of financing, you’ll just need your EIN and lenders will review your business credit score.
If you have a newer business, lenders might want to see your personal credit score to see if you’ve shown an ability to repay your debts. In fact, you may be required to offer a personal guarantee, essentially acting as a cosigner for your business. In that way, your personal credit score can affect business credit opportunities.
If your personal credit score needs work, you still have options for securing business financing, such as using a cosigner who has good credit. In addition, the Small Business Administration (SBA) offers for bad-credit borrowers, though there are other requirements you’ll have to meet.
Will business lenders always consider my personal credit?
No, business lenders won’t always consider your personal credit, especially if you have a solid business credit history — including a record of on-time payments and other signs of responsible credit usage. Those lenders may consider your personal credit in some situations (like if you’re starting a new business), but your business credit history will grow more important over time.
How you can build your business credit
If you’re starting a new business, there are so many things to think about — but don’t forget to set up business banking services and start building a business credit history.
Open business bank accounts and credit cards
Start by registering your business and getting an EIN. Once you do, business bank accounts for checking and savings, as well as business credit cards, can help you manage your finances. Bank accounts may not directly impact your business credit score, but your credit cards will, especially if you use them regularly for business expenses.
Ask vendors to report your transactions to credit bureaus
If you make purchases from vendors, you can ask them to submit a record of your payments to credit reporting agency Dun & Bradstreet once you apply for a DUNS Number. Many vendors are paid through invoicing, and those kinds of transactions can help your business credit score if they are reported.
Take out business loans or lines of credit
Once you’ve established your business, a small business loan or line of credit can diversify your credit profile and improve your overall amount of available credit. When you apply for a business credit account in the business’s name — with the business’s credit information — you establish a stronger business credit history, as long as you meet your debt obligations. Remember that opening too many accounts too quickly can actually hurt your score.
Make regular, consistent debt payments
Like a personal credit score, your payment history is an important part of your business credit score. Consistently paying your bills on time will help your score grow; missing even one can hurt your score and cause it to drop. While other factors also play a role in those scores, your track record of timely payments matters a lot.
Advantages of using business credit
- By keeping your business finances separate from your own, you’re protected from liability in case of business failure, which may not hurt your personal credit.
- Your bookkeeping and accounting should be less complicated if you use business credit instead of personal credit for financing.
- You may have access to higher funding amounts at more favorable rates with business credit as opposed to personal credit, depending on the size of your business.
- Business credit is designed to meet the specific needs of businesses with lines of credit, invoicing and integration with other business services.
Does business credit affect personal credit?
As long as you keep your personal finances separate from your business finances, you shouldn’t have to worry about your business credit affecting your personal credit. For example, an auto lender won’t check your business credit score when deciding whether to approve your application for a car loan — they would only consider your personal credit report and score. However, if you become seriously delinquent on small business debt, a lender may report it to personal credit bureaus, depending on their reporting policies.