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Business credit is based on your business’s financial history and is tied to your business’s EIN number. Personal credit, on the other hand, is based on your personal spending history and is tied to your social security number. Because these two types of credit are distinct, your business credit score is also separate from your personal credit score and is calculated using different factors—even though each is essentially a numerical evaluation of creditworthiness. Although different, business credit and personal credit are often connected and business owners should monitor both carefully.
Many of us know that we have personal credit that is related to our personal financial spending history. If you’re a small business owner, however, it may surprise you to learn that you have business credit based on your business’s financial history as well. In many cases, personal credit and business credit are linked (especially if you’re a sole proprietor), but the two are essentially different and should be treated as such. That being said, you may be wondering how exactly, then, these two credit types interact—is business credit based on personal credit? Does business credit affect personal credit?
To help you make better financial decisions for your small business, we’ll break down the differences between business credit and personal credit as well as answer these questions—explaining the information you need to know about how these two types of credit relate to one another. We’ll also offer suggestions on how you can separate your business and personal finances and the credit products that are available to you to help you do so.
As we mentioned, although business credit and personal credit are often linked, they are, in fact, separate. On the whole, despite the similarities in name, these two types of credit reflect different financial histories, even if they’re for the same person. To explain, personal credit is based on your personal spending history—meaning credit that’s been extended to you for personal reasons, like personal credit cards or student loans. Your personal credit is tied to your social security number (SSN). Additionally, your personal credit history is compiled by the three major credit bureaus, Equifax, Experian, and Transunion. You have one profile with each of these entities.
Business credit, on the other hand, is based on your business’s financial history—meaning credit that’s been extended to your business, like with a business credit card or small loan. Unlike personal credit, which is tied to your SSN, business credit is tied to your employer identification number (EIN), or business tax ID Number. If you don’t have an EIN, you can apply for one online—this number enables the government to recognize your business for tax purposes. It’s important to note that if you’re a sole proprietorship with no employees or a single-member LLC with no employees, you don’t technically need an EIN. In this case, your business’s credit would be tied to your SSN, and therefore, your personal credit. However, that being said, business credit is generally separate from personal credit. Whereas the three major credit bureaus track your personal credit history, your business credit history is reported by Experian and Equifax, as well as other reporting services that deal specifically with businesses. One of the most well-known business-only credit reporters is Dun & Bradstreet. Additionally, since your business credit is tied to your EIN, your business credit history will follow you through any venture in which you use that number.
Another important difference between business credit and personal credit is the applicability of legal protections. On the whole, you’re entitled to greater legal protections when it comes to your personal credit. For example, 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 inaccurate 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 on your business credit report that you want, but the issuer is not legally obligated to respond. This, therefore, is one of the many reasons that you should be vigilant in managing your business finances and carefully monitor your business credit report.
Wondering how this separation between business credit and personal credit applies to credit scores? Well, your business credit score and personal credit score are also different, even though both are a number that represents creditworthiness. To explain, your personal credit score is a numerical summary of your personal spending history, ranging from 300-850, with a higher score denoting better creditworthiness. Generally, your personal credit score is calculated based on credit reports from the three major credit bureaus—factoring information such as payment history, amount of debt owed, length of credit history, types of credit, and new credit. Banks and lenders use your personal credit score to determine whether to lend you—a good credit score also means you’ll qualify for lower-interest credit.
Your business credit score, on the other hand, is a numerical measurement of how creditworthy you and your business are—once again, tied to your EIN. A business credit score typically ranges from 1-100, the higher the number, the more likely lenders, credit card companies, and other sources of financing are to extend you credit. Whereas the method for determining your personal credit score is pretty standard, there is more variation for business credit scores, depending on the credit bureau. That being said, however, business credit scores are typically affected by factors such as credit utilization ratio, payment history, length of credit history, business size, industry risk, etc. If you’re looking to grow your business with financing like a long-term business loan or business credit card with a low APR, it’s important to know (and improve) your business credit score.
Now that we’ve broken down the distinctions between these two types of credit, let’s address the ways in which business credit and personal credit are connected and directly answer some of those questions we previously mentioned.
As we briefly discussed earlier, your business credit and personal credit can be connected if your business is a sole proprietorship—as well as if it’s a single-member LLC with no employees. In this case, if you have not applied for an EIN, your business credit will be tied to your social security number, and therefore, your personal credit. Although it is possible to use your personal credit as a sole proprietor, it’s best to get an EIN and separate these two types of credit. It may seem convenient to use your personal credit because it’s just one place to track charges, and your personal account is probably already established. Unfortunately, however, this opens you up, as a business owner, to personal risk should your business ever face financial trouble. This legal liability is the single biggest reason you should separate your personal and business finances. If your business has financial issues, you can be held individually responsible.
The answer to this question—Is business credit based on personal credit?—as we’ve shown, is technically no, as business credit and personal credit are different. However, there are cases in which your personal credit influences your ability to qualify for business credit products. To explain, when you apply for a business credit product, like a small business loan or a business credit card, it’s likely that your personal credit history will factor heavily in your approval and in determining the amount of credit extended to you. For SBA loans, as an example, you typically need a personal credit score of at least 650 to qualify. If business credit and personal credit are separate, you may be thinking, why do lenders use your personal credit score in their application process? Essentially, lenders use your personal credit history as one of several measures to determine your business’s trustworthiness—if you, as the owner of the business have good credit, your business is more likely to pay back loaned credit as well.
This brings us to our next question: does personal credit affect business credit? Again, technically these two concepts are separate. However, as we explained, your personal credit affects your ability to obtain business credit products–therefore influencing how you can grow and improve your business credit. Another example: say you want to apply for a business credit card to build your business’s credit history. As part of the application process, the issuing bank will look into your personal credit history. If you have poor personal credit, you may not qualify for the card, and therefore you won’t be able to use this product (at this time) to build your business credit. Although your personal credit is not the only factor used in approving a business credit product application, it certainly can make a difference. Therefore, to qualify for this business credit card, you’ll have to take steps to improve your personal credit before you can work on your business credit.
Additionally, in a similar vein, your personal credit history can also affect not only your qualification prospects but also the specific terms of a business credit product once you do qualify. The better your personal credit history, the more likely you are to receive reasonable terms and low-interest rates on something like a business term loan.
Finally, vice versa of the question we answered above: does business credit affect personal credit? There are scenarios, in fact, in which your business credit can affect your personal credit. For example, if you’re using a business credit card to build your business credit history, and you signed a personal guarantee (which many card issuers require that you do), you’ll then be held personally responsible for paying even if your business can’t—which could, in turn, affect your personal finances and credit. Furthermore, depending on the card issuer, your business credit card activity may be reported for your personal credit reports, in addition to your business credit reports. These possibilities make it even more important to closely watch your business credit and the terms and conditions that apply to particular business credit products.
As you can see, although there are nuanced ways in which business credit and personal credit are connected, it’s of great importance to separate your business and personal finances. Separating business and personal finances (and by extension, your credit) can not only save you from complicated bookkeeping but also as we’ve mentioned, it can help protect your personal assets and liability and actually improve your business loan and credit prospects.
The best way to start separating your business finances from your personal ones is to open a business checking account—giving you one place to store your business funds and pay for business expenses. With this account, it will be easier to manage your books and ensure that business funds are separate from personal. Additionally, applying for and using a business credit card can help you keep your finances separate while also building your business credit history. A business credit card will also make tracking expenses easier and is a great way to establish good business credit that will be useful to you as your business grows.
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Although there are clear differences between business credit and personal credit, they’re also connected in many complex ways. Therefore, answers to questions such as does business credit affect personal credit, aren’t a simple yes or no. As a business owner, it’s important to remember the distinction between these two credit types and carefully monitor both your business credit and your personal credit. Setting up a business bank account and using a business credit card are both great ways to separate your finances, and hopefully will enable you to establish your business’s credit history, making qualifying for funding easier in the future.