Why You Should Separate Your Business and Personal Credit

Taking care of business
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Credit is your ability to borrow money. This includes instances of directly borrowing cash, as well as transactions that involve getting something now and paying for it later. You are probably already familiar with the concept of credit and how it applies to your personal credit scores.

However, small business owners may not be aware of the benefits that come with opening separate lines of credit for their business. Many business owners may find it preferable to keep their personal credit and business credit separate.

Why Use Business Credit?

Your small business's credit is linked to your personal credit unless you have taken certain steps to avoid this. If you are just starting your business, then the business is essentially an extension of yourself. Your business and personal credit report will initially be linked.

By establishing business credit, you separate 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, that won't be reflected on your business credit.

How to Establish Business Credit

Establishing business credit separate from your personal credit is not complicated, but it does take time and effort. Begin by separating your business finances from your personal finances. Set up a business bank account, and keep your books separate.

A good way to start is by getting a credit card, small loan, or credit line from your bank in the name of your business.

Credit reporting bureau Experian recommends establishing yourself as a business entity, such as a limited liability corporation (LLC), to begin building credit. However, you may be able to qualify for business credit cards without incorporating your business.

You may also need to apply for an employer identification number with the Internal Revenue Service (IRS), depending on the type of business entity you establish. Setting up a dedicated phone line in the name of your business can also help build business credit.

Financing for Business Credit

Until you establish good 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, and those assets serve 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 will keep your personal assets out of your business finances.

Business owners have lending options that average consumers don't. Many different types of startup business loans have been developed specifically with small business owners in mind.

Build Credit With Suppliers

Credit doesn’t have to be a formal loan; you can also initiate a credit deal with suppliers. Anytime you get goods and services today, but you don’t have to pay until later, you're establishing a line of credit. The entity giving you goods and services becomes a creditor. By sticking to payment plans, you're building business credit.

Suppliers and partners can report your credit to business credit bureaus, but they might not necessarily do so. If they don’t report, it’s possible to add these trade lines yourself as references to your Dun & Bradstreet report.

Dun and Bradstreet provides suggestions of what kind of trade references to list, and how they affect your business's credit score.

Provide Information and Monitor

Building your business’s credit isn’t exactly effortless. You may need to provide extra information to the credit bureaus. You’ll also want to make sure the information they do have is accurate. Review your credit reports periodically and fix any errors you find.

Business Credit Bureaus

Business credit rating companies are 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 how business credit scores differ from individual credit scores. Your individual credit scores are similar between the credit bureaus (although perhaps not identical). Even custom scoring models will put you in more or less the same category between lenders.

With business credit scores, on the other hand, the 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.

However, as with personal scores, these business credit scores serve a similar function—they affect your business's ability to conduct business on credit. They're based on your payment history, public records, and other information.

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 monitor your credit.

The Bottom Line

It can be a painful process to separate your business and personal credit. However, the benefits outweigh the costs of the effort. In the end, you know your personal credit is safe if something happens to your business, and if something happens to your personal credit, your business won't suffer for it.

Article Sources

  1. Experian. "How to Build Credit for Your Business." Accessed April 28, 2020.

  2. Experian. "How Do I Qualify for a Small Business Card?" Accessed April 28, 2020.

  3. Experian. "How to Improve Your Business Credit Score." Accessed April 28, 2020.