Why You Should Separate Your Business and Personal Credit

Taking care of business
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Credit is your ability to borrow money (or get something now and pay later). You may be familiar with the concept when it comes to your personal credit scores. Most business owners would probably prefer to keep their personal and business credit separate.

Why Use Business Credit?

Your small business' credit is linked to your personal credit unless you have taken certain steps to avoid this. If you are just starting your business, the business is you, so your business and personal credit report will initially be linked.

Consider establishing business credit for one reason: Doing so separates your personal credit from your business. This will prevent either one from affecting the other. For example, if you miss a few credit card payments on your personal account, you don't want that to reflect on your business credit and vice versa.

Establishing business credit separate from your personal credit is not complicated, but it does take time and effort.

Initially, begin by keeping business finances separate from your personal finances. Set up a business bank account, and keep your books separate.

Apply for an employer identification number to assist you with the separation of your credit. To officially separate your credit, you'll need to establish yourself as a Limited Liability Corporation (LLC) or incorporate your business.

Financing for Business Credit

Until you establish business credit, most lenders will require a personal guarantee when requesting a business loan. You’ll need to put assets such as your home on the line, with those assets serving as collateral for the loan.

You might be able to find a lender that will grant you a no-personal-guarantee loan. No-personal-guarantee loans are loans that keep your personal assets out of your business finances.

There are more lending options available to you as a business owner. Many different types of startup business loans have been developed to assist you. If possible, get a credit card, small loan, or credit line from your bank in the name of your business.

Use credit with suppliers

Credit doesn’t have to be a formal loan; you can also initiate a credit deal with suppliers. When you buy on credit, you get goods and services today, but you don’t have to pay until agreed-upon times. Anytime you can pay within 30 or 60 days, you’re developing credit. This type of credit may need to be reported.

Suppliers and partners can report your credit to business credit bureaus. If they don’t report, it’s possible to add these trade lines yourself as references to your Dun & Bradstreet report (D&B provides suggestions).

Provide information and monitor

Building your business’ credit isn’t exactly effortless. You may need to provide information to the credit bureaus, and you’ll certainly want to make sure they have accurate information on your company. Review your credit reports periodically and fix any errors you find.

Business Credit Bureaus

There are a number of credit bureaus reporting on individuals, covering everything from your borrowing history to your medical history. Business credit rating companies are similarly abundant, so focus on the three major bureaus as you build credit: Dun & Bradstreet, Equifax, and Experian.

Each bureau has its own scoring model, and they all use different information. This is where business credit scores differ from individual credit scores: Your individual credit scores are similar (although perhaps not identical), based on your payment history, public records, and other information. Even custom scoring models will put you in more or less the same category between lenders.

With business credit scores, information comes from different sources. For example, at Dun & Bradstreet, you provide much of the information to fill out your profile and your DUNS number. Each bureau may score and operate differently.

As with personal scores, these business scores affect your business' ability to conduct business on credit.

Fees

Cost is another major difference between your personal credit and business credit scores. Be prepared to pay for information, whether you’re asking or providing information. You don’t get free credit reports every year. Instead, you’ll pay a modest fee to see your credit.

It can be painful at first to separate your business and personal credit. However, the benefits outweigh the cost of the effort. If there’s any silver lining, in the end, you know your personal credit is safe if something happens to your business.