Recent research has shown that a significant number of small business owners in America don’t even know they have a business credit score. A majority of these small business owners don’t know where to find information on their score or how to interpret it.
As such, let’s take a look at what constitutes personal and business credit scores, understand their differences before we delve into the relationship between the two.
Differences between personal credit and business credit
|Personal Credit||Business Credit|
|Identification||Tied to your Social Security Number||Tied to your Employee Identification Number|
|History Used||Personal financial history||Business financial history|
|Factors Considered in Credit Score||Payment history, credit utilization, credit history, new credit, and hard inquiries||Payment history, credit utilization, credit history, demographic details, public records|
|Score Range||300 - 850||0 - 100|
|Major Credit Bureaus||TransUnion, Equifax, and Experian||Equifax, Experian, and Dun & Bradstreet|
Personal credit, such as credit cards or mortgages, are established in your name and Social Security Number. Business credit, such as corporate credit cards and business loans, are established in your business entity’s name as well as Employment Identification Number (EIN) or tax identification number.
2. History Used and Factors Considered in Credit Scores
Personal credit is calculated based on your financial history. The two biggest factors that affect a personal credit score are payment history (35%) and credit utilization (30%). Other contributing factors include the length of credit history, new credit, and credit mix.
Business credit is calculated based on your business’s financial history. Factors such as payment history, credit utilization, and credit history are common with personal credit, albeit in business spending. That said, there are unique business considerations that credit bureaus account for such as demographic details, company size, and industry risk. Any public record on your business such as bankruptcy and prior judgments will be reviewed as well.
3. Score Range and Major Credit Bureaus
Once you have a line of credit under your name, each credit issuer will report your account’s activity to the major credit bureaus - TransUnion, Equifax, and Experian. While there are differences in the ways each bureau calculates credit scores, personal credit scores will generally fall within the range of 300 to 850. A credit score of 760 is considered very good to attain better interest rates and payment terms.
On the other hand, each credit issuer will report your business’s credit activity to business credit bureaus, Equifax, Experian, and Dun & Bradstreet and they will score your business within a range of 0 to 100. Generally, a business credit score of 80 and above is encouraged as applicants may obtain a larger credit line at more favorable contract terms.
The relationship between personal credit and business credit
Let’s answer the big question: Does business credit affect personal credit?
We can technically say that no, business credit should not affect personal credit as they are separate and distinct from one another. That said, it is impossible to have a complete separation between the two in the real world. Personal credit and business credit are very much linked, especially for small business owners, and will impact your business.
For instance, if lenders want to minimize the risk of providing credit to a small business, they may request for you, as the business owner, to put up a personal guarantee. This personal guarantee would affect your personal credit even if the purpose was meant for business spending. Do take note that there will also be a temporary negative effect on your credit score when the credit company runs a hard inquiry on your personal credit report.
Additionally, for entities that are sole proprietor businesses or single-member LLCs with no employees, personal credit would be used instead of business credit. This is because these types of business entities do not require an EIN although it is available for them to register. In most instances, an EIN is required for business tax purposes and kick starts your business credit history.
It is also possible for business credit activity to affect personal credit as well. This is largely dependent on the credit issuer. Some business credit issuers will report all activity to your personal credit report, but most of the time they will only do so when it is triggered by actions such as a new account opening, any late payments, or if the business loan had defaulted.
Where possible, it is generally good practice to keep personal credit and business credit as separate as possible. This allows you to access larger credit lines and protect yourself from personal liability of business debts. However, the reality of the matter is that it will be linked, especially for small business owners. While the credit scores are ultimately separate and different, the assumption is that the responsibility and reliability of the business are only as good as the business owner at the helm. The implication of this is that lenders can use your personal credit history as one of the measures to determine your business creditworthiness and vice versa. Thus, as a small business owner, it is important to make the effort to improve both your personal and business credit scores over time.