Personal vs. Business Credit: How It’s Different and Why It Matters

Building a separate business credit history can help your business qualify for better terms and improve your cash flow.

Strong personal credit can be vital to a business’s success. But what some small business owners don’t realize is that their business can have its own, distinct credit profile. 

By building your business’s credit, you increase your chances of qualifying for lower business insurance premiums, getting more favorable terms from suppliers, and taking out business loans without putting your personal assets at risk or hurting your personal credit. 

Business credit belongs to your business

As with personal credit, there are business credit bureaus — the main three are Equifax, Experian, and Dun & Bradstreet (D&B). 

When a business takes out a loan, opens a factoring account, or has a terms agreement, a record of the account and repayments could be reported to the business bureaus. Additionally, the business credit bureaus may collect information about businesses from public records and third-party sources, such as lien filings and industry data. 

While personal and business credit reports both contain similar types of information, the credit reports are completely separate. However, sometimes a business credit report will have information about key personnel, including the owner. 

Also similar to personal credit, business credit scores are based on a business’s credit profile. 

For example, vendors and suppliers may consider your D&B Paydex score (which ranges from 1 to 100) when deciding whether to offer you a terms agreement. A business’s FICO SBSS credit score (which depends on the owner’s personal credit score and business’s credit history) can be a factor when applying for an SBA loan

Business credit can help protect your personal assets and credit

Business credit can directly impact your business’s cash flow. By building your business credit over time, you can get lower business insurance premiums and longer terms agreements with vendors.

Another additional benefit is that a business that establishes its independent credit history may be able to qualify for its own credit accounts.

For example, rather than using your personal credit card, your business could get a corporate credit line from a vendor. Your business can then order supplies and pay over time without involving your personal accounts, which can be important for two reasons.

The first is that the business may be solely responsible for the debt. If the business suddenly takes a downturn and can’t afford to pay its bills, creditors may be able to go after the business’s assets but might not be able to sue the owner. 

The second is that the business credit account won’t be reported on the owner’s personal credit reports. The percentage of available credit that you’re currently being using (called your utilization rate) can be a major factor in your personal credit scores, even if you pay bills on time and in full each month. By keeping business purchases off your personal accounts, you can eliminate their impact on your personal credit. 

For small business owners, personal credit is often still important

There is a catch, though. Many creditors recognize that a small business owner is intimately intertwined with the business’s finances and success. 

As a result, lenders may check the owner’s personal credit when reviewing an application. 

Lenders may also require the owner to sign a personal guarantee, which means the owner will be personally responsible for the debt if the business doesn’t repay the loan. These are especially common on business credit cards, and some business card issuers even report your account activity to both the personal and business credit bureaus. 

How to start building business credit

Even with the exceptions, building business credit can be important. It can also take time, so better to start now rather than wait until you desperately need additional funding. Here’s how: 

  1. Make sure the business is incorporated or registered as an LLC. Sole proprietors aren’t eligible for business credit.
  2. Apply for a federal Employer Identification Number (EIN).
  3. Open a business bank account using the business’s name and EIN. 
  4. Apply for a D&B DUNS number, which you can do for free from D&B
  5. Get a separate phone line in your business’s name and list it in public directories under the business’s name. 
  6. Open accounts with creditors, vendors, and suppliers that report to the business credit bureaus. Here are a few popular options
  7. Make payments on time, or early, to build a good credit history. 

The final last steps can be challenging because many companies don’t report to the business credit bureaus (reporting is voluntary for both personal and business accounts), and unreported payments won’t impact your credit history. BlueVine is an exception; Fundera recently recognized it as one of the only online factoring companies that report payments to Experian’s business credit department.

Disclaimer

The information, opinions, and advice in this blog post are provided for educational purposes only, and do not necessarily state or reflect those of BlueVine and/or its partners, including The Bancorp Bank and Celtic Bank. Neither BlueVine nor its partners are responsible for the accuracy of any content provided by author(s) or contributor(s). For information about BlueVine products and services, please visit the BlueVine FAQ page.