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Credit Reports and Scores, credit score, Establishing Credit, Small Business, Small Business Owners

Personal Credit vs. Business Credit: What’s the Difference?

By Courtney Nagle | July 22, 2019

small business credit score

Your personal credit score and business credit score are two separate but related numbers that tell lenders how creditworthy you, or your business, are.

On the surface, the difference between the two scores is clear: One relates to your personal financial history, and the other to your business’s financial history.

But because credit bureaus use similar metrics to measure both scores, and because personal credit is occasionally used in lieu of business credit (for sole proprietors), there is some confusion as to how to build and maintain each form of credit separately.

Here is a rundown of personal and business credit, how they relate to each other, and how to keep both in good standing.

What is personal credit?

When you first take out a line of credit as an individual—your first credit card, or loan to pay for college—you begin your personal credit history and kick off the process of building a personal credit score. This score is linked to your Social Security Number.

From then on, your score reflects your personal financial history. If you always pay your bills on time, don’t use too much of your available credit at once, and avoid negative information like foreclosures and charge offs, you’ll develop a good personal credit score, also known as a FICO score.

If instead you carry a balance on your lines of credit, fail to develop a diverse mix of credit sources—different credit cards, an automobile loan, and a mortgage, for example—and accrue many “hard inquiries” on your credit score (which occurs when you apply for a new source of credit), your FICO score will be low.

Different credit bureaus report personal credit scores. All of them consider similar but occasionally varied factors when calculating your score. Generally, it will be a number in the 350-800 range, which 800 being a “perfect” score.

What is business credit?

When you start a business and begin to file business taxes, you’ll need an Employee Identification Number, or EIN. This unique number is often required for business owners—and even when it’s not required, it’s still a good idea to get one—and obtaining one kicks off your business’s financial history and thus your business credit score.

Bureaus take many of the same factors as personal credit scores, albeit in regards to business spending, into account when calculating your business credit score. Then there are some considerations unique to the business world. The three categories of factors used to create your score are:

  • Credit history: Similar to your personal credit score, business credit bureaus will also review your payment patterns, outstanding balances, credit utilization ratio, and so on.
  • Demographic details: Specific details about your business and your industry will also be considered, including how long you’ve been in business, how many employees you have, and your industry classification.
  • Public records: Any bankruptcies, judgments, and liens—all of which is public information—are considered as well.

Bureaus like Experian and Equifax, which also report personal credit scores, and Dun & Bradstreet, which calculates business credit scores only, can produce business credit reports for you. Business credit score is on a scale from 1-100, with 100 being the highest.

Key differences between personal and business credit

In many ways, these two scores are alike: They tell lenders if you are a good bet to repay your debts, which can influence their decision to extend you credit at all, and at what terms.

But there are also plenty of ways in which these two scores differ. We’ve already seen that different factors play into how each score is produced, and of course one score reflects your personal history while the other reflects your business dealings. But here are some other key differences between the scores:

Corrections

Credit bureaus aren’t perfect, and sometimes incorrect information—false hard inquiries or charge offs, for example—can show up on either report.

There are more protections in place for consumers on personal credit reports. You can challenge any incorrect information on your personal credit report and by law, the issuer must respond to your request. The issuer is not obligated to respond to challenges to your business credit report. That means you have to be more diligent about monitoring your business credit report for issues.

Transfers

Your personal credit report stays with you for life. Business credit reports, however, stay with the business. Although your business credit is a reflection of how you have handled the business’s finances, if you were to sell your business, that report follows the new owner. This means your business will be more valuable if your business credit score is high.

Capacity

Businesses have a greater capacity for credit. The best business loans can be for as much as millions of dollars, repaid over many years. Personal loans usually max out at about $30,000 or so. In order to maximize your potential for funding, you’ll want to build and maintain your business credit.

Why you should keep personal and business credit separate

In many instances, an EIN is required for business tax purposes, which means you’ll start to build a business credit report right away.

An EIN isn’t required for all businesses, like when you’re a sole proprietor or single-member LLC with no employees. At that point, your personal credit would instead reflect your business’s financial history.

Keeping your business and personal finances separate, however, is a good business practice. It makes filing your taxes easier, builds your capacity for credit, and makes scaling up (hiring employees, applying for business loans for expansion) easier when the time comes. You’ll also avoid personal liability for your business’s debts.

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Once you become a small business owner, your business credit score becomes an important number to manage, maintain, and improve—much as you do for your personal credit. You might have different goals for both scores, but at the end of the day, the goal is the same: to present yourself as a trustworthy, professional, and valuable person.

About the Author: 

Eric Goldschein is a staff writer at Fundera, a marketplace for small business financial solutions. He covers entrepreneurship, small business trends, finance, and marketing.

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