Credit has a large role in both personal finances and business finances. For individuals, a good credit score can lead to low-interest loans, good rewards cards, and even perks like better auto insurance rates (in many states). Good credit can have similar benefits in business, where it may be essential when securing funding, negotiating finances, and even applying for a commercial lease.
Everyone should seek to manage their personal credit as best they can. If you’re a business owner, you should do the same with your business credit too. Here’s how to balance business credit and personal credit as an entrepreneur.
Understanding Personal vs Business Credit Scores
Personal credit and business credit are distinct from each other. The two are calculated differently and have somewhat different uses. Your business credit is highly unlikely the same as your personal credit — and yes, you can have good business credit even if your personal credit is bad.
Personal credit reflects your history of managing personal debts like credit cards, mortgages, and personal loans. It’s tied to your Social Security Number and tracked by consumer credit bureaus such as Equifax, Experian, and TransUnion.
Business credit assesses your company’s ability to meet its financial obligations and is linked to the business’s employer identification number (EIN). Bureaus like Dun & Bradstreet, Experian Business, and Equifax Small Business compile business credit history and calculate your business credit score.
The two types of credit are scored on different scales:
- Personal credit score is on a scale of 300 – 850
- Business credit score is on a scale of 0 – 100
The two are also sometimes used for different purposes. Both can be essential to securing credit cards (personal or business), mortgages (home or commercial), unsecured loans (personal or business), and auto loans or leases (personal or commercial). Some different purposes are:
- Personal credit scores may also be considered for employment screenings, insurance premiums (in many states), cell phone contracts, and some other surprising purposes.
- Business credit score may be considered when navigating vendor and partner relationships, supplier payment terms, regulatory requirements, funding from investors, and contracts with clients, customers, or government agencies.
Can your business have good credit when personal is bad?
Yes, your business can have good credit when your personal credit is bad. Just as business finances should be kept from personal finances, a business credit rating can be very different from a personal credit rating.
Whether your business achieves a good credit rating depends on how you manage its cash flow, though.
Building a Strong Business Credit Profile from Scratch
Before you can achieve a good business credit score, you’ll first need to qualify for business credit. This requires a couple of preliminary steps:
- File Articles: Your business will need to be registered with the state as an LLC, Corporation, or other entity (e.g. 501(c)3). Sole proprietors generally aren’t eligible for business credit.
- Registering a business normally requires filing Articles of Organization, Articles of Incorporation, or something similar with the state where your business is located.
- Obtain an EIN: You’ll need to get an employer identification number (EIN) from the Internal Revenue Service (IRS). This is like a Social Security number for your business. Obtaining an EIN is free and fairly easy. You can apply through the IRS’s website, or getting a number may be included in a business formation service if you use one.
An EIN is necessary to have your business’s finances tracked separately from your personal ones. Your business finances will be monitored through the EIN, and your personal through your SSN.
Not only will an EIN be used by the agencies that monitor business credit, but it’ll also be needed when reporting taxes, negotiating supplier and vendor terms, opening business bank accounts, applying for business credit cards, and in many other situations. Your LLC or corporation will need an EIN even if you don’t plan on actually using a small business loan.
Using Personal Credit Score for Your Business
You won’t have any business credit history when first starting out — an EIN is not a business credit score.
Effective Strategies to Improve Business Credit
Establishing or improving business credit uses the same principles as building good personal credit does — make on-time payments and use financing responsibly. These two general principles will go a long way toward improving business or personal credit.
However, the exact strategies to establish a good credit history are slightly different when building business credit than personal credit. Some effective ways to improve business credit are:
1. Establish Trade Lines With Suppliers
Suppliers are some of the first counterparties that might offer a line of credit. They’re usually more willing to provide purchase order financing, which is standard in some industries and available in many.
Purchase order financing is where you finance part or all of an order that you place with a supplier. While suppliers are unlikely to ship a full order without payment, they might send a partial order. You might alternatively be able to have a supplier produce a full run, but receive it in portions as you make payments.
Establishing trade lines with suppliers is one of the most effective ways to build a history of making on-time payments early on. The trad credit you build will help you build credit for your business.
2. Pay Vendors on Time
Vendors also are often willing to sign contracts before a business can secure favorable financing. For example, a marketing company, software provider, security service or transport company might be willing to offer a contract for their services.
Consistently making contract payments to vendors is another way to establish a history of on-time payments.
3. Responsibly Use Business Credit Cards
Business credit cards are often the next-easiest line of credit to obtain. Your business will probably receive offers for new credit cards, possibly even before any major payment history is established.
Using a business credit card responsibly — not running up large debts and making monthly payments on time — can help your business credit in two major ways. First, this is another way to establish on-time payments. Second, using only a portion of your credit allowance results in a lower credit utilization rate. Credit utilization is one of the more significant factors in business credit ratings (and personal credit ratings).
4. Limit Credit Inquiries
Credit inquiries frequently have a temporary negative effect on business credit scores, just as they do with your personal score. The temporary effect may be minor once your business’s credit profile is established. Having even a temporary ding when there’s little other history can have an oversized negative impact, however.
You’ll need to allow some credit inquiries in order to secure financing. Limit inquiries to only financing that you need and will use, so the negative impact is kept as minimal as possible.
Maintaining Boundaries Between Personal and Business Finances
Keeping personal finances and business finances separate is crucial for both legal protection and credit building.
Repeatedly using personal finances might be considered to “pierce the corporate veil.” If a lender successfully argues this, you could be personally responsible for business debts even though you have an LLC or corporation.
Using personal finances also won’t help build your business credit score. Putting business expenses on a personal credit card doesn’t help establish a business’s credit utilization and payment history, for instance.
These best practices will help you maintain boundaries between your personal and business finances:
- Separate Accounts: Use dedicated bank accounts and business credit cards for business expenses. Use your personal bank accounts and personal credit cards only for personal expenses.
- You’ll need to make an initial deposit when opening an account, and this one-time deposit probably will be made from a personal account. If you need to refund the business in the future, try to make as few additional deposits from personal accounts as possible.
- Pay Yourself: You can make transfers from your business bank account to your personal one, as a means of paying yourself. Those funds can then be used for personal expenses since they’re in your personal account. Avoid paying yourself more than the business can afford, for you don’t want to refund the business account from your personal one.
- Proper Documentation: Keep meticulous records of all business transactions. Proper documentation supports the financial and legal separation of your business entity, which is important during audits or legal disputes. Receipts, contracts, and any other records should be retained.
- A financial advisor specializing in business finances and taxes can advise you as to how long different documents should be kept. If you don’t have an advisor who specializes in business finances, get connected with one through our financial advisor matching tool.
Avoid Personal Guarantees When Possible
If you need to secure supplier contracts, a commercial lease, or commercial financing early on, you might be required to provide a personal guarantee.
A personal guarantee means that you, yourself, will cover the associated costs should your business be unable to meet its financial obligations. You’re accepting personal liability for the loan, and using your personal assets as collateral.
A personal guarantee is based on your personal credit score and history. It’s not until your business has some financial history that it’ll have a business credit score, which then can be used for contracts, leases, financing, etc.
There may be times, especially early on, when a personal guarantee might be unavoidable. Don’t provide a personal guarantee unless truly necessary, however, as doing so puts your personal assets at risk. You might be able to avoid one by paying more, providing collateral, amending terms, or finding alternative lenders to work with.
Before providing a personal guarantee, consult a financial advisor or business attorney so that you know exactly what risks you’re taking. At Invested Better, we have a network of advisors who can help you assess this risk. You can find a qualified advisor by letting us know what you need through a short quiz.
Addressing Personal Credit Health
While business financing is primarily (and hopefully only) based on business credit, it’s still important to have good personal credit if possible.
Good personal credit will help you with personal finances. Better personal finances have many benefits, not the least of which might be putting less strain on the immediate cash flow of your business. If you can reinvest money rather than use it to pay personal debts, you may be able to grow your business faster.
There are several steps you can take to improve your personal score if you currently have poor credit:
- On-Time Payments: Pay minimum monthly payments for outstanding debts on time. Payment history is one of the biggest factors affecting personal credit.
- Repay Debts: Debt utilization is another major factor that affects personal credit. Pay down debts as much as you’re able to. This might not be easy if funding a new business, but it can have a large positive impact on your personal credit score.
- Avoid New Debt: New credit inquiries and new debts can have a temporary negative impact on your credit. Avoid applying for new personal debt if you expect that you’ll have to provide a personal guarantee in the near future.
- Monitor Credit Reports: Monitor your personal credit report for any errors or fraudulent activity. You can request a free report from each of the major personal credit bureaus annually through annualcreditreport.com (federally authorized; avoid look-alike sites).
A qualified financial advisor who assists with personal finances can assist with developing a more detailed strategy for improving personal financial health. We can help you find a personal financial advisor too.
Get Professional Help With Business Finances
Managing business finances is somewhat different from personal finances, but just as important. Business finances include building business credit, but also taking care of cash flow, creating grounded long-term forecasts, and analyzing opportunities.
If you want help specifically with business finances, we at Invested Better regularly match business owners with advisors who understand business finances. Just answer a few quick questions about your personal and business finances, and we’ll find an advisor for you.
General Disclaimer: The information provided on this site is for informational purposes only and should not be construed as financial advice. Invested Better does not guarantee the accuracy or completeness of the information provided. Please consult with a licensed financial advisor before making any financial decisions.
Investment Risk Disclaimer: Investing involves risk, including the possible loss of principal. Past performance is not indicative of future results.
