What Should You Know About Business Credit vs. Personal Credit?

Your credit history and credit score are incredibly important throughout many areas of your life.

“A bad credit score can cause insurance companies, cell phone providers, and other businesses to charge you higher rates or additional fees,” according to Ben Luthi, writing for Remitly.

With that being said, what should you know about the relationship between business and personal credit? If you want to start a business and you need funding, could a less-than-perfect personal credit history negatively impact your ability to do so?

The following are some key things to know about the differences and the intersections between business credit and personal credit.

The Importance of Your Personal Credit Score

More than likely if you’re thinking about or are already in the process of starting a business, it’s going to be a small business. As the creator of a small business, lenders are very likely going to look at your personal finances before they decide as to whether or not they will extend business credit to you.

This is almost always the case in the early days of a business or when a business is extremely small.

Even if your business is a bit more established and you’re applying for credit to expand it if there’s not enough financial information the lender may look to your personal credit.

Business Structure and Personal Score

The way you structure your business can play a role in whether your personal credit score is relevant and if so, how much so.

If you’re operating your business as a sole proprietorship, your personal credit score is one and the same with your business credit score. There’s no difference here between you and your business. You’re personally liable for debts you accrue through your business as well.

If you set your business up as a partnership, it is similar to a sole proprietorship in that your personal credit score is relevant. The personal credit history of other partners is also relevant.

If you have a limited company structure and you’re not personally liable for your businesses’ debt, lenders might not look at your personal credit history, but they can if they feel it’s necessary.

Building Your Business Credit

Finally, if you’re starting a business, you should work on improving your credit, but there are ways you can start establishing your business credit as well.

First, you need to incorporate your business or form an LLC, because otherwise, credit bureaus don’t know a business exists. Then, you should get an employer identification number or EIN.

Then, you can start reviewing your business credit reports and ensuring they are accurate.

Setting up relationships or trade lines with vendors is a good starting point to establish a business credit history. Even if you’re only spending a small amount each month to a vendor, it’s very important. You want to make sure you’re always making payments on time or early if possible.

With that being said, not every vendor is going to report to credit bureaus, so you may also need to open a business credit card account.

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