The credit you use for business is separate from your personal credit. They are governed by different credit bureaus and scoring models.
Personal credit consists of any credit lines you currently have opened and/or closed. This can include auto loans, mortgages, and credit cards.
A personal credit report can also include other accounts and payment history (i.e., rent and utilities) if you use a reporting service. Your personal credit report includes negative items like collections, evictions, and bankruptcies.
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Similarly, business credit reports will consist of tradelines that belong to your business. These could be tradelines that you or your business partners have opened.
Tradelines on business reports can consist of loans, credit cards, and other types of financing. In addition to information reported from creditors, business reports can include data reported by vendors.
For instance, if you own a spa, the vendor who supplies your massage oils could report your payment history to the credit bureaus.
The resulting credit reports and scores look drastically different from one another. Here are just a few ways these two types of credit differ.
The purpose of personal credit is to determine your creditworthiness. Your credit score can influence what products you qualify for (loans and credit cards), expand or limit your housing options, and even impact your employability.
It’s usually more complex to obtain business financing compared to personal financing. Factors other than business credit scores can be more important, like your business revenue, time in business, and industry code.
Also Read: Business Credit Cards vs. Personal Credit Cards
In addition to that, lenders usually look at information on your business credit report (like financing, negative remarks, etc.), and even the business owner’s personal credit score.
When it comes to personal credit, there are three major credit bureaus: Equifax, TransUnion, and Experian.
In contrast, there are many business credit bureaus. Dun & Bradstreet is the most famous.
Experian and Equifax also have business credit divisions that are separate from their consumer credit divisions.
Paynet (which is owned by Equifax), the Small Business Financial Exchange (SBFE), and Creditsafe are less-well known, but they are business credit bureaus as well.
When it comes to generating a credit report and score, there are differences in how and when this is done by personal and business credit bureaus.
Some business credit bureaus will begin generating your business report once you have a tradeline reporting; others require you to set up an account first. Dun and Bradstreet, for instance, requires you first to obtain your DUNS number.
The credit bureaus for personal credit (also referred to as consumer credit) will automatically begin generating a report once you have information reporting. So even a teenager could have a credit report if, for instance, they are added as an authorized user on a credit card.
Credit Scores & Ranges
FICO and VantageScore personal credit scores mostly range from 300 to 850. You can have a separate credit score based on data from each of the three major consumer credit bureaus.
Conversely, the business credit bureaus each offer unique scoring ranges.
There are different consumer credit scoring models, but they typically use similar credit score ranges. (Usually in the 300-850 credit score range.) The credit scoring company FICO offers dedicated scores for auto lenders, insurance, credit cards, and more.
For example, the FICO Bankcard Score 8 is used in the credit card industry. The FICO Auto Score 9 is used auto lending, and the FICO Score 5 is used by mortgage lenders.
For business credit scores, additional scoring models include delinquency predictor scores, failure scores, risk score/rating, and more.
It is also important to note that business scores are 100% separate from your personal credit scores.
Business Credit is Far Less Regulated Than Personal Credit
There are many more personal credit regulations than business credit regulations when it comes to credit and reporting to the bureaus.
The key piece of legislation governing credit practices is the Fair Credit Reporting Act. There is also the Truth In Lending Act (also referred to as Regulation Z). These two pieces of legislation offer benefits like:
- Free access to your credit report
- The right to dispute errors/fraud on your report
- Forcing negative information to fall off after 7 years (10 years for bankruptcy)
- The right to seek damages if this legislation is violated
- Lending fees must be disclosed (interest rate, annual fee, etc.)
- Limit upfront fees on credit cards
- Limit liability for fraudulent purchases on credit cards
Unfortunately, many of these benefits only apply to personal credit. When it comes to business credit:
- You are not entitled to a free credit report
- Dispute processes are lengthy
- Negative information can remain on your reports for 15+ years
- Lenders do not have to disclose or limit fees
- Liability charges can be significantly higher for larger businesses
Why Lenders Look at Small Business Owners’ Personal Credit
Business lending/financing is not always based on your business credit history.
Rules and regulations vary from lender to lender. Some lenders only check personal credit history, while others may check both.
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For small business loans and financing, the lenders that do check business credit check both the score and the information in the report. They want to see how prompt you make your payments and check for other loan obligations.
Small business owners who want to get the best financing need good personal credit and business credit.
It is very difficult to get small business financing without a good personal credit score. However, small business owners that don’t build their business credit are shut out from the best business financing opportunities.
The biggest loans, lowest interest rates, and best terms are reserved for businesses with great business credit.
Once a business’s credit is sufficiently established, the business owner can get to a point where their personal credit won’t even need to be checked in order to qualify for financing. Business owners that have great business credit can get to a point where they don’t have to personally guarantee their small business loans.
This should be the goal for every small business owner – to have your personal credit completely separated from and independent of your business’s credit.
Can My Personal Credit Affect My Business Credit?
Generally speaking, your personal credit scores cannot influence your business credit scores and vice versa.
The only exception to this rule is when you are trying to obtain a Small Business Association loan (SBA loan).
As a part of the SBA loan screening process, the lender or your SBA advisor will need to pull your FICO SBSS score. This is the only business credit score that takes into account your business credit as well as your personal credit.
However, small business lenders review personal credit reports and scores. Bad personal credit can get your business financing applications turned down!
Your personal credit affects your ability to get business financing.
Can Personal Credit Be Used in Business?
Yes. As mentioned earlier, your personal credit scores need to be good to qualify for business financing. With good personal credit scores and reports, most small business owners can qualify for big credit lines with small business credit cards.
It’s not uncommon for small business owners to get 5-10 small business credit lines with credit limits of $5,000-$15,000 each.
Small business loans usually require high personal credit scores. If you have bankruptcies, foreclosures, or other negative items on your credit report, that can hold you back from getting business financing.
But depending on what type and size of business you have, using personal credit may not be enough. That’s why building business credit is important.
How Do You Separate Business Credit from Personal Credit?
When you are a business owner, it is essential to separate your personal finances from your business finances. Preferably before you even have the business up and running.
But often, a business organically grows out of work you are already doing, and you might find yourself in a situation where your finances and credit are mixed.
So, how do you fix it?
Step 1: Make your business legal. At a bare minimum, you need to file paperwork with your local city or state. You could also form a Limited Liability Company (LLC), Small Business Corporation (S-Corp), or C-Corporation. Sole proprietors (your default if you don’t choose a business entity) get business funding too, but there are less options available.
Step 2: Create a separate business bank account. And switch over all of your business income and expenses to this account.
Step 3: Obtain a DUNS number. This number allows you to generate and view your DUNS number and D&B credit report.
Step 4: Obtain an EIN from the IRS. This is used for tax payments and filing. It is also used for business financing applications.
Step 5: Open a business credit card. Opening a dedicated business credit card will help you keep expenses separate. If done correctly, it can help you build business credit, too.
Step 6: Contact any existing vendors/creditors with your EIN/DUNS numbers. To ensure that information begins to be reported to the business credit bureaus.
Step 7: Use your DUNS and EIN on all future transactions. On equipment rentals, loan applications, vendor accounts, and anything else relating to your business.
As a small business owner, your business credit scores and reports are separate from your personal credit history.
They do have some similarities in reporting. Both report payment history from creditors. And both report credit card information, business cards on business credit, and personal credit cards on consumer credit.
But they also have many differences. This is because the nature of business is different. Cash flow and vendor relationships are just some of the factors that can impact business credit.
Regardless of the differences, building good credit, both business and personal, can be vital to the long-term success of your business.
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