Business credit is a useful tool for any business to get the financing it needs to grow. It can help your company get better loans, lower rates and more cash flow. But how does your own personal credit factor in? The answer is complicated. To untangle the differences between the two and manage your credit effectively, here are some things to keep in mind.
Business credit vs. personal credit: What’s the difference?
Much like personal credit, business credit allows you to borrow money to help pay for expenses. Lenders use your business credit score and report to check your business's borrowing history, credit use and payment habits to determine how responsible your company is with its money.
While personal credit and business credit function similarly, there are a few main differences to keep in mind. Simply put, personal credit scores measure your financial reliability as an individual, while business credit scores reflect the creditworthiness of your business as an entity.
Personal credit scores from the three main consumer credit agencies — Experian, Equifax and TransUnion — usually range from 300 to 850. Business credit scores use a smaller scale, from 1 to 100, and vary among the “big three” business credit bureaus: Dun & Bradstreet, Experian and Equifax.
Let’s take a look at the general differences between each type of credit.
Business Credit
- Credit history tied to: Business credit history, business finances
- Credit score associated with: Employer identification number, DUNS number, Unique Entity Identifier
- Credit reporting agencies: Dun & Bradstreet, Equifax, Experian
- Credit-funding opportunities: Business credit card, business loan, business line of credit, tradeline
Personal credit
- Credit history tied to: Personal credit history, personal finances
- Credit score associated with: Social Security number
- Credit reporting agencies: Equifax, Experian, TransUnion
- Credit-funding opportunities: Personal credit card, personal loan, personal line of credit
Should I keep my personal credit separate from my business credit?
While new owners may be tempted to use personal credit for business expenses, doing so comes with risks. As your business grows, its expenses increase. If these expenses are linked to your personal credit, you can end up with significant liabilities. Using personal credit for business expenses can also distort your company’s debt-to-income ratio on financial statements. This can make it harder for lenders to get a clear picture of your company’s creditworthiness.
Each time a hard credit report is pulled, your personal credit score may take a hit. And with multiple banks or other entities frequently requesting your personal credit report, your score may be impacted. To prevent this, it’s important to separate your accounts as soon as possible — which starts with building business credit early.
That said, sometimes using personal credit is the only viable way to start out.
Does personal credit affect my ability to get a business loan?
Without an extensive business credit history, new business owners may need to rely on their personal credit history to prove they’re creditworthy. A strong personal credit score tends to make it easier to secure financing to give your business the boost it needs.
Personal guarantees, in which you promise repayment from your own funds, can help reassure lenders when considering financing. If you choose to provide a personal guarantee for a business loan, your personal credit score may be affected, especially if you run into issues paying off the business debt.
It’s common for many business loans and business lines of credit to ask for a personal guarantee when there is no other collateral — meaning your personal credit could be the key to getting the loan. To keep your personal credit score in good standing, it’s important you make regular payments on time.
As your business grows, lenders will likely rely more on your business credit alone, and your personal credit details shouldn’t carry as much weight.
Does business credit affect my personal credit?
The impact of your business credit on your personal credit depends on the structure of your business.
If an application requires your Social Security number, chances are your personal credit also will be reviewed. A sole proprietorship, for example, is tied much more closely to personal credit since it’s not its own legal entity. If an application pulls your personal credit report, it may result in a ding on your personal score.
Other business structures, such as partnerships or limited liability companies that are registered as distinct entities have more distance from personal credit and are less likely to impact personal credit standing. However, some lenders may still require a personal guarantee. In these cases, if the business defaults on the loan, the borrower becomes personally responsible for covering the expenses, which could put personal credit at risk.
To avoid personal guarantees, borrowers can sometimes secure funding with other forms of collateral, such as promising business assets or a share of future sales. If you do agree to a personal guarantee, it’s important to make sure you understand the full terms, your ability to repay, and how it could affect your financial well-being.
Does a business credit card affect my personal credit?
Opening a business credit card is a great way to start separating your business expenses from personal ones. By using a designated card to pay exclusively for company expenses, you can more easily track your finances and start to build business credit independent from your own. But keep in mind that your business credit card may still affect your personal credit in several ways:
- Hard credit inquiry
Applying for a business credit card may involve a hard check on your personal credit report. Just as with business loans, lenders may need to use your personal credit history to assess your creditworthiness. This is especially true if your business is set up as a sole proprietorship or if you’ve agreed to a personal guarantee — where your personal assets are directly tied to the account. A hard check on your personal credit may affect your credit score and can stay on your credit report for up two years, though typically doesn’t impact your credit score after a year. - Credit utilization
Credit utilization is the difference between the amount you spend and your credit limit. If you’re approaching your business credit limit, adding significant expenses on your card might impact your personal credit score, since some issuers report monthly utilization to consumer credit bureaus. For major purchases, consider a business loan instead, which would not affect your personal score. A good rule of thumb is to keep your credit utilization below 30% of your limit. - Payment history
A solid history of on-time payments is crucial. Although major business credit card issuers might not report monthly activities, they often report missed payments — usually when you’re more than 30 days late. This late mark can seriously damage your personal credit, lingering on your reports for up to seven years. Late payments may also be penalized with a higher APR, which can skyrocket to nearly 30%. To keep both your business and personal credit scores in good standing, be sure to stay up to date on your payments.
How can I build business credit?
Start early. Just as you wouldn’t open your first personal credit account the day you plan to buy a house, the same goes for business credit. Begin small and build it over time.
The less you rely on personal credit to pay for day-to-day business expenses, the more effectively you create a separation between the two. Though you may need to lean on personal credit to get your business started, the key is to limit its use for business expenses moving forward.
Taking these steps can make it easier for you to distance your company’s credit from your own:
- Establish your business as a separate legal entity. Register your business as its own legal entity — such as an LLC or a corporation. This way you can create a clear distinction between personal and business assets from the start.
- Open a business bank account. A dedicated account for business expenses will make it easier to maintain this separation moving forward.
- Get a business credit card. While the initial application may involve your personal credit, using a business credit card consistently will help you build a distinct business credit profile. Stick with it. Your credit will grow in time.
Speak with a Chase business banker to find the right card and account for your business and explore other resources to help you grow.
