Business and personal credit both play key roles in the lives of small business owners. Understanding the differences between these types of credit, how they affect each other, and how to build business credit will help your new or existing small business to thrive.
This guide will explain this essential information as well as how regulation of business credit works, the key business credit reporting industries, and more.
The Business Credit vs Personal Credit Mystery Solved
There are some things you need to know before you can understand the differences in business credit vs personal credit. First, it is important to understand exactly what business credit is, and what it is not. Business credit is credit in the name of the business, not the name of the owner.
This means more than simply applying for credit using your business name. You need to apply using not only the name of your business, but also separate business contact information. Furthermore, you should not use your Social Security Number to apply for credit.
Note: You may have to use your Social Security Number for identification purposes. But for credit purposes you need to use your EIN. If you apply for credit using your business name, but add your personal contact information and your social security number, it will be reported to your personal credit profile.
However, if it is set up properly, you can get business credit that does not affect your personal credit profile at all.
4 Key Differences Between Business Credit and Personal Credit
When you look at business credit vs personal credit, you can’t think in terms of one being better than the other. They are different in many ways, but equally important if you are a business owner. You need both.
With business credit, you can get limits that are 10 to 100 times that of personal. This allows for not only greater buying capacity but also a smaller credit use rate. While business credit scores really just depend on whether you pay on time, personal credit comes from that plus utilization rate, average age of your accounts, and recent inquiries.
If you use your personal credit to fund your business, you will probably be maxing out your personal credit cards to pay for everything. This will severely negatively impact your personal credit scores.
Both are affected greatly by late payments. Yet, business credit is affected faster. This is because late payments are not reported to personal credit for 30 days usually. Conversely, late payments on business credit accounts are considered late even if they are only one day past due.
Hard credit checks on your personal credit lower your credit score. A credit check on your business credit does not affect your business credit score.
Personal credit is scored on a scale that goes up to 850. Some business credit scoring models only go up to 300. Others range from 0-100.
What the Scores Mean
A business credit score is a mathematical model used to depict a business’s risk of going 90 days late on an account within the next 12 months. A consumer credit score is a mathematical model that shows a consumer’s risk of being 90 days late on an account within the next 24 months.
How Business vs Personal Credit Reports Differ
There is a lot more to a credit report than the credit score, and the information on personal reports and business reports is not the same.
Data on the Report
Business credit accounts are listed by industry, not the name of the company that issues the credit. This is in contrast to how accounts show up on personal reports. Also, personal credit reports show the exact amounts on accounts, while business credit shows rounded amounts.
How long data stays on a personal credit report varies, but typically it is for the life of the file. Of course, bankruptcies come off in 7 to 10 years depending on what type it is, and foreclosures can come off after 5 years usually. Instead, information stays on business credit reports 3 years on average.
There is also a difference in which vendors and lenders will report to the business credit agencies. With personal credit almost every account will report your payment history. Yet only about 7% of business credit accounts report payments (positive experiences) to business credit reporting agencies – although a lot of them will report a failure to pay. You must be intentional to get accounts reporting to your business credit profile if you want to build your business credit score.
The credit reporting agencies (CRAs) are different as well. Business credit reports come from:
- Dun & Bradstreet
- Equifax Business
- Experian Business
- FICO SBSS
- And a handful of lesser known business credit reporting agencies
Personal credit reports come from either Equifax, Experian, TransUnion, or FICO.
Credit Report Monitoring
Everyone can get a free copy of their personal credit report from the main three CRAs each year. These include Equifax, Experian, and TransUnion. This is not true of business credit. There are no consistently free business credit reports.
There are no real options for a free business credit report unless you are denied a loan based on it. Then you may be able to get a copy to see what caused them to turn you down. There are, however, several business credit monitoring services that charge a monthly fee. Despite the cost, it is worth it to see your score and keep up with it.
Business Credit vs Personal Credit Regulation and Oversight
Regulation and oversight exist for personal credit in many forms. The Credit Card Accountability Responsibility and Disclosure Act of 2009, the Truth in Lending Act of 1968, and the Fair Credit Reporting Act of 1970 are just a few examples. Business credit has little regulation, and none of it provides for correcting mistakes on your report.
The current state of regulation affects who is able to process each type of report. Your signed authorization is required to access personal credit reports, but this is not the case with business credit reports. They are available to anyone, for a fee.
Lenders can pull your business credit score without you ever knowing. Without help accessing it yourself, you may never know what is on it.
Does Business Credit Affect Personal Credit?
Set up properly, the short answer is no. It does not. If you set your business up properly and establish your business credit profile correctly, your business credit accounts will never hit your personal credit report.
That said, the reverse is not always true. Your personal credit score can be used in the calculation of your business credit score, depending on which credit reporting agency your lender decides to use. This is why both a business credit profile and a personal credit profile are important for business owners.
Another thing to keep in mind is, your personal credit absolutely affects the overall fundability of your business. That is, the ability of your business to get money. In fact, there are over 100 factors that can affect your business’s fundability. Your business credit score is one of them. Personal credit is another.
Do business credit cards build personal credit?
This can get murky as well. The actual answer to this question is no, a business credit card does not help you build personal credit. However, many people get credit cards that are designated by the lender to be for business owners. Yet, they apply for it with their personal information, including their social security number.
In this case, the card is not technically business credit at all. It is a personal credit card that is designed for business expenses. This type of card can help you build personal credit if you handle it responsibly.
Still, since its approval is not based on the credit of the business, but rather the credit of the owner, it is not business credit.
How to Establish Business Credit
Another major difference in business credit vs personal credit is that you establish them very differently. Most people realize that their personal credit profile builds passively as they acquire personal debt. A business credit profile is not the same.
A business owner must be intentional about building a business credit profile. This starts with setting up the business to be recognizable to lenders as a fundable entity separate from the owner. How do you do this?
It starts with building a fundable foundation. It is best to do this from the inception of the business. If it is long past the business’s startup date, then the sooner the better.
Here are the first steps.
1. Get an EIN
This is an identifying number for your business similar to an individual’s SSN. Use it instead of your social security number to apply for credit. You may have to provide your SSN for identification purposes, but that is simply to prevent fraud related to identity theft. You can get an EIN for free from the Internal Revenue Service.
2. Separate Business and Personal Contact Information
Resist the urge to use your personal phone number and address as your business phone number and address.
3. Incorporate Your Business
This is vital. It is much easier to set up as a sole proprietorship or partnership, but for lenders to truly see your business as separate you need to incorporate as either an S-corp, LLC, or C-corporation. Which one you choose depends more on your need for liability protection and your budget.
Talk to your tax professional or attorney about that. They each work equally well for establishing business credit.
4. Open a Dedicated Business Bank Account
This serves a number of purposes. For business credit building, a business bank account serves to further separate your business from you as the owner. However, it also helps keep business and personal finances separate for tax purposes. Many lenders also require a business bank account before they will approve funding.
5. Get a D-U-N-S Number from Dun & Bradstreet
Of course, it’s possible to build a business credit profile with other credit reporting agencies without this number. However, Dun & Bradstreet is the largest and most commonly used business credit CRA. You really need to establish your profile with them.
You cannot do this without applying for a D-U-N-S number. It’s free and easy to apply for on their website.
A D-U-N-S number plus three business credit experiences reporting to Dun & Bradstreet will generate a PAYDEX score for your business.
Business Credit vs Personal Credit: Different but Equally Important
When comparing business credit vs personal credit, it becomes obvious they are not the same. When it comes to running a business however, they are both important. Having a separate business credit profile with a strong business credit score opens many more opportunities for funding than using your personal credit alone.
Business credit can also help protect your personal credit, by keeping larger business accounts off your personal credit report. Still, personal credit is also important to your business because it is one of many factors that affect the overall ability of your business to get funding, or fundability.
Good business credit scores, and good personal credit scores, working together, can help you get funding for your business.
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Faith Stewart has a BBA in Business Administration with a major in accounting and over 20 years of experience in the fields of finance and accounting. She is currently helping businesses build business credit and get the funding they need as a content writer at CreditSuite.