It’s true that in many cases your personal credit and business credit are linked, but that doesn’t mean it’s a good idea to treat them both equally or use them interchangeably. Make better financial decisions for you and your small business by taking a few minutes to understand the similarities and differences of business and personal credit.
Plenty of small business owners—especially sole proprietors—use their personal credit to operate their business. It seems convenient at first because there’s just one place to track charges, and the personal account is probably already established. Unfortunately, this opens individual owners up to risk should their business ever face financial trouble.
This legal liability is the single biggest reason you should separate your personal and business finances. If your business sinks, you don’t want you and your family to go down with it.
So, the most important thing is to separate your business and personal credit. The next step is to understand that although business cards and personal cards share some similarities, there are substantial differences that should affect how you use each one.
For starters, personal credit protections have been put in place to protect individual consumers. Those protections don’t always apply to businesses.
Other credit terms can change for business credit without warning. For individual consumers, the CARD Act requires that your credit card issuer give you at least 45 days warning before changing things like late payment fees or your interest rate. Similarly, there are no caps on the interest rates business card issuers can set.
Another key difference with business credit card terms is that payment allocation does not necessarily benefit the cardholder. With personal credit, your payments will be applied to balances with the highest interest rates first, while with business credit cards your payments may be applied to amounts with the lowest interest rates first. As a result, you pay more in interest and the issuer makes more money.
There are personal credit protections that give you the power to challenge any item that appears on your personal credit report. You can request that negative entries on your personal report be removed in accordance with laws on fair credit reporting.
Similar laws do not exist for business credit. You can challenge anything you want, but the issuer is not legally obligated to respond. Because this makes it harder to deal with business credit problems, it’s even more important to monitor your business credit report and take care to protect it from negative entries.
It’s not all bad news, however. In plenty of cases, business credit is extended to small business owners with many, if not all, of the same protections offered to individual consumers. It’s important to know which lenders offer these protections and services so that you can avoid more predatory credit issuers.
When you apply for a business loan or a business credit card, there’s a good chance that your personal credit history will factor heavily in your approval and in determining the amount of credit extended to you. So it’s in your best interest to clean up any dings on your individual credit report before you apply for a small business loan or credit card for your business.
With that in mind, you should also understand that business credit checks are more rigorous. When it comes to business credit scoring, you can expect the lenders to look into the following items, which are not a part of your personal credit score:
Arming yourself with this information when you apply for business credit can help you ask the right questions and identify lenders that offer the most favorable terms for your small business.