Your Business Credit vs. Your Personal Credit – Why It’s Important to Know the Difference
Posted On: October 5, 2021 in: Business Consumer Financial Education
by Ryan Shea, Senior Vice President - Credit Administration
For many entrepreneurs, using personal financial resources to help meet the financial needs of their company is common, especially during those critical start-up years. What most of these entrepreneurs don’t know is that blurring the lines of personal and business finance can have negative outcomes and consequences in the future. Let’s look at the issue from the start:
Personal Credit vs. Business Credit. On the personal side, your credit score is linked to your Social Security Number and reflects your personal credit history. Scores range from 300-800 and vary according to your payment and debt management behavior. Paying bills on time, not maxing out your credit limit and avoiding a major negative event (like a foreclosure) will help maintain a strong credit score, which can mean a lower interest rate on some credit products.
Business Credit Employer Identification Number (EIN). On the business side, your EIN reflects your business dealings and is the business equivalent of the SSN in identifying you to credit bureaus which will look at behaviors like paying bills on time, outstanding balances, and how much credit you use in your business to create a Business Credit Score. These range from 1-100.
The Takeaway
You have different goals to meet your personal financial needs and your business financial needs. Keeping your personal finances separate makes tax filing less complicated and avoids incurring personal liability for business debt.
Two Main Sources of Business Credit
Business Credit Cards
Offers for these cards are everywhere, so the issue is not how to get one, but how to get the right one. Window shop all you want but apply only to your finalists (or finalist) to avoid having credit bureaus become wary of you applying for lots of cards at once. Also, not all business credit cards report card activity to consumer credit agencies, and you may prefer that or at least know your potential provider’s policy in this area.
In terms of card usage and potential to grow your credit line, there are three things to remember:
- On time payments matter. They can account for up to 35% of your FICO score.
- It’s better to have a larger credit limit and use less of it than keep your limit low and max it out often.
- Longevity matters. Keeping and using a card over time works in your favor.
Business Loans
Getting a business loan can be daunting if you’re not prepared. The solution is to always be prepared. A lender is going to need your balance sheet, operating expenses, and cash flow.
When you have your financial packet created then you can shop for a lender. Make sure the lender you choose is interested in your company, not just making the loan. And insist on regular touch points. Small issues don’t grow into large ones if you consistently keep your lender in the loop.
Final Tips
Whatever type of credit you choose to use, here are three things that will help you and your company:
- Check your credit report
- Keep business and personal finances separate
- Focus on being trustworthy and professional
The wise use of credit can be key to the success of your family and your company, so taking the time to learn, manage and continually improve your credit is a smart investment in your future.