Your credit score is important for many reasons, including obtaining a loan or mortgage.
But what happens when you have business credit? Does business credit affect personal credit? Nearly every business owner asks this question when considering whether to get financing.
And the answer is yes; business credit can affect your credit in a few ways in specific situations. After all, they are both types of credit scores.
However, the two scores can still work together to help you get approved for loans and other types of financing.
This post answers that specific question and other inquiries often relating to business loans, credit cards, and personal and business credit. Also, we’ll discuss the best ways to improve your credit score to ensure that you’re doing everything possible to improve your overall financial standing.
What is Business Credit?
Business credit is a type of credit that businesses can use to finance their operations.
There are many different types of business credit, but the most common ones include lines of credit, loans, and credit cards. Businesses can also build up their business credit by paying their bills on time and maintaining a good credit history.
What is Personal Credit?
Personal credit is a type of credit for individuals for personal use.
You can use it for various purposes, including financing the purchase of a car or home, consolidating debt, or paying for unexpected expenses.
Differences Between Business and Personal Credit Score
Personal and business credit scores have key differences:
Business credit score
Business credit scores indicate how well your business manages debt and its credit riskiness. It goes from 1 to 100.
A business owner incorporates their business and then applies and receives an EIN to establish this score.
They register this number with the three credit bureaus and may decide to apply for a separate Dun and Bradstreet number.
As the business pays vendors and supplies, they establish a credit history with these agencies.
The three credit bureaus and Dun and Bradstreet evaluate the business’s payment history, utilization ratio, and other credit factors to establish a business credit score.
Read all the main differences between personal and business credit scores.
Personal credit score
Your personal credit history reflects how you handle money over time. Individuals with higher credit scores are less of a financial risk to lenders.
It goes from 300 to 850.
The three credit bureaus use your SSN to establish your personal credit score, reflecting your creditworthiness to creditors and lenders.
The credit agencies review your payment history, how much you owe, and the length of your credit history. They also review the types of outstanding credit you have (credit cards, loans) and the number of new credit accounts you’ve recently opened.
Learn how to boost your credit score.
How Does a Business Loan Affect Personal Credit?
Only lenders can affect your credit when they require both personal and business credit scores to approve a loan and report loan payments to both types of histories.
Likewise, setting up your business structure determines whether the owners are personally liable for business debt.
LLCs, S and C Corporations keep their personal and business expenses separate.
Therefore, these business structures offer the best protection to shield the officer(s) and partners’ personal credit histories.
Lenders that require a business owner to submit personal collateral regardless of the business structure mean that person is personally responsible for the debt.
In some situations, an owner may declare personal bankruptcy when a business defaults on a loan, adversely affecting their personal credit.
How to avoid this?
A business owner can use their business assets as collateral to secure a loan so they don’t jeopardize their personal credit.
Business credit cards approved solely on an owner’s EIN (not an SSN), business name, and business credit score won’t affect their personal credit.
Are business loans reported to credit bureaus?
It depends on the lender. Before you sign a loan agreement, that’s an important question if you intend to take out future business loans for more significant amounts at better terms.
You build a stronger business profile when they report timely payments and payoffs to the 3 credit bureaus.
Situations when applying for a business loan could affect personal credit
- It could affect your credit if you are the guarantor on loan.
- Applying for a business loan could also affect your credit if you use your personal assets as collateral for the loan.
- If you default on the loan, this will also hurt your credit.
- If the business cannot repay the loan, this could also harm your credit score.
Types of Business Loans That Can Affect Personal Credit Scores
Any loan that a lender approves based on your legal name, address, social security number, and personal income can positively or negatively affect your credit score, depending on your repayment history.
These are typically secured loans where lenders require collateral in the form of personal assets.
How Does a Business Credit Card Affect Personal Credit?
No, business credit cards do not affect your personal credit. This is because the issuer report business credit card activity on a separate credit report from your personal report.
So, even if you have poor financial management with your business credit card and rack up a lot of debt, the lender won’t affect your individual credit score, but this could change if the lender asks you for your credit when asking for a loan and it’s approved with it.
What Could Situations Affect Personal Credit By Applying for Credit Card For a Business?
When a business applies for a credit card, the issuer will often check the personal credit history of the business owner or primary contact.
That’s why no business credit cards report to personal credit because it depends on the lender.
However, if the business owner has poor credit, this could affect the approval decision for the business credit card. In some cases, the issuer may approve the business credit card but with a lower credit limit.
Or, the issuer may approve the card but require a higher interest rate or security deposit.
Some situations that might hurt your credit score due to a business credit card are:
- They could affect your personal credit if you are a sole proprietor.
- If you are a co-signer on the account.
- If you default on your business credit card payments, this could negatively impact your credit score.
- Closing your business credit card account could also affect you.
Types of business credit cards might affect personal credit score
There are two types of credit cards that can affect your personal credit score.
- The most common type is the Small Business Credit Card. Banks and other financial institutions issue these cards, and they report to the consumer credit bureaus.
- The Corporate Credit Card is the other type of business credit card that can affect your credit score.
Why Should You Separate Your Personal Credit From Your Business Credit?
There are a few key reasons why you should keep your personal and business credit separate.
It can help you avoid personal liability for business debts
If your business incurs debt that it cannot repay, creditors may look to you as the owner to repay the debt. However, if your company has a separate credit profile, creditors are less likely to come after you for repayment.
It can help you get better terms on loans and other financing products
Lenders often view businesses with separate credit profiles as more financially stable and less risky. As such, you may be able to qualify for better terms on loans and other financing products if your business has a separate credit profile.
It can help you build a stronger business credit history
The lender will report a positive activity to the business credit bureaus if your business makes all its payments on time and keeps its debt levels low. Over time, this will help your business build a strong credit history, making it easier to get financing in the future.
What Is a Business Loan, and How Does It Work?
Business loans provide temporary financial assistance to start or expand a business. Borrowers agree to a lender’s terms and conditions before they receive funding.
The borrower makes installment payments within a specified period in exchange for capital.
The total repayments include the principal amount borrowed, business loan interest rate, and closing costs.
Business owners use the funds for business-related expenses. Examples include:
- paying employees
- improving working capital
- purchasing equipment and inventory
- making building renovations
- expanding products lines and services
- and more!
Business loans for cash flow problems are helpful; use cash to make one-time investment opportunities or pay off credit card balances.
How to Build Business Credit With Bad Personal Credit?
Building business credit can be a challenge if you have bad credit. However, it is not impossible. There are a few things you can do to help improve your chances:
- Get a business credit card – Even if you have bad credit, you may be able to get a business credit card from some issuers. This can help create a positive payment history for your business, which will help build business credit.
- Use vendor lines of credit – Many vendors will offer lines of credit to businesses, even if they have bad credit. Using these lines of credit and paying them off on time can help build positive trust with creditors and improve your business’s standing.
What Happens if You Don’t Pay Back a Credit or Loan?
Once the lender reports to credit agencies, an immediate result is that your business credit score and possibly personal will plunge.
Usually, a lender isn’t concerned about one missed payment, but 3 or more alert them of a problem.
Lenders will notify late payments in your business credit report.
Negative activity on your credit history prevents you from getting approved for future loans making it harder to obtain working capital when needed.
In the worst cases, some lenders will try to collect what’s owed by hiring a collection agency or bringing a lawsuit against your business.
If you offer collateral as part of the loan agreement, the lender can legally take possession of your personal property (a house, car, personal bank account).
When you can’t repay a loan, your best approach is to work closely with your lender. Be honest with them about your financial situation. Then, you may be able to resolve the issue without ruining your credit and business’s reputation.
How to Improve Business Credit Using a Business Loan
A sole proprietorship can use a business loan to improve the owner’s personal credit score even though they use their SSN to report taxable earnings.
Because sole proprietors use their own credit rather than business credit when applying for a business loan, they can improve their personal credit score when they establish and maintain a good credit history.
They do this by making payments on time and paying off loans and credit cards.
As their personal score improves, they are better positioned to open vendor accounts, apply for a business card, and qualify for future financing for higher loan amounts at better rates.
Ways to improve your personal credit score:
- Concentrate on paying off the oldest past-due accounts. Creditors will continue to add late payment fees, which you eliminate, thereby reducing your overall debt by paying them off.
- If you have several accounts to pay off, start with the smallest one first. Once that’s paid, move to the next account until you’ve paid off all your accounts.
- Work with collection agencies to settle outstanding accounts you legitimately owe. Ask them to remove the negative entry on your credit report once you pay the balance.
- While you do this, don’t apply for new credit. You can open new accounts later but pay them monthly if needed. If you can’t do that, don’t open the account.
- Your goal is to pay off each account in full each month or billing cycle. If that’s not possible, pay more than the minimum amount and don’t take on new debt until you can pay off your accounts.
- When you can pay off debt each month, ask creditors to increase your credit limits, lowering your total credit utilization and improving your credit score.
- Programs such as Experian Boost report rent and utility payments to your Experian credit report once you link your bank accounts to the free service.
Individuals that handle money responsibly receive the highest scores from credit bureaus.
So, Does a Small Business Loan Affect Personal Credit?
Your personal credit is affected when lenders require both personal and business credit scores to approve a loan and report loan payments to both types of histories.
Likewise, setting up your business structure determines whether the owners are personally liable for business debt.
Moreover, sole proprietors use personal SSNs, and owners of partnerships provide personal credit information when taking out loans. Therefore, it directly affects their own credit if they don’t repay debt.
Working with a lender that doesn’t require your credit report or business assets as collateral for financing is to your advantage.
Camino Financial loans have more lenient requirements than traditional banks and other online alternative financers.
Apply for a small business loan today and explore your funding options. You will be pleasantly surprised with our reasonable minimum requirements, fast funding, and knowledgeable customer service representatives.
What do issuers report to the credit bureaus?
Issuers report to the credit bureaus on many factors, including payment history, credit utilization, and length of credit history. So, with this information is possible to calculate an individual’s credit score.
Payment history is the most important factor in determining a credit score, so make all payments on time.
How to get business credit with bad credit?
Follow these tips:
Set up credit lines with vendors and suppliers on a 30 or 60-day basis, make timely payments to every creditor, and ask them to report your payments to the 3 major credit bureaus.
Only spend 30% of your total available credit, which helps build your business credit score.
Review your business credit history often to check for inaccurate reporting.
Find lenders willing to offer loans to borrowers with bad credit. Then, make timely payments to build credit.
Do you need good credit for a business loan?
You won’t require good credit scores for business loans since some lenders need to verify that your business has sufficient income and has been in business for a specified length of time to be able to repay a loan.
These lenders charge higher rates for smaller loan amounts for borrowers with bad credit and may require collateral or a co-signer to secure the loan.
Does taking a business loan affect your credit score?
It can affect it both negatively and positively.
Your credit score should increase if you make and pay payments on time. Conversely, it goes down when you have no way to repay it.
The average business loan credit score ranges from 600 to 650. Lenders look for a credit score of at least 620 to approve a business loan.
Does a business account affect personal credit?
Yes, it can, depending on how you legally set up your business, whether a person offers personal assets as collateral, and using an SSN to apply for a business credit card or loan.
Consult with an accounting or legal professional if you have questions before borrowing money.
Can a business credit card help to build business credit?
Business credit cards can help to build business credit. You’ll need to use your business credit card responsibly and make on-time payments to build good business credit.
You should also try to keep your utilization rate (the amount of your credit limit that you use) low and make sure that your account is in good standing.
If you manage your business credit card responsibly, it can be a great way to build up a good credit history for your business.
This can be helpful if you ever need to borrow money or take out a loan in the future.
What are the business credit bureaus?
Dun & Bradstreet, Experian, and Equifax.
What are some business credit cards that do not report to personal credit bureaus?
Some of the following business credit card issuers don’t report to personal credit bureaus (but do to business credit bureaus):
Do businesses have credit scores?
Yes, businesses have credit scores. Lenders use these scores to determine whether or not to extend credit to a business. Businesses with higher credit scores are more likely to get approved for loans and lines of credit.
So, do I need good credit for a business loan? No, you do not need good credit for a business loan. Many lenders will work with you if you have bad credit.
Does having a business account help your credit?
Yes, having a business account can help improve your business credit score.
This is because business accounts often have built-in features that can help you manage your finances and make payments on time.
Do inquiries affect business credit?
Inquiries can affect business credit in a few ways.
First, inquiries can indicate to lenders that you’re having a tough time getting financing from other sources, which could lead them to believe you’re a high-risk borrower.
Additionally, too many inquiries in a short period of time can lower your credit score, making it more difficult for you to get approved for loans in the future.
Can my LLC affect my personal credit?
There are a few ways your LLC can affect your personal credit, but it ultimately depends on how your LLC is structured and managed.
If you are the sole owner of your LLC and incur any debt of defaults on payment, this could affect your personal credit.
However, if you have a manager or member who handles the finances of the LLC, the payments won’t affect your score. So, if you have a limited liability partnership (LLP), each partner’s personal credit may be at risk if the LLP incurs any debt or defaults on payments.
How to build business credit without personal collateral?
There are a few ways to build business credit without collateral.
One way is to use a business credit card. You can also get Lines of Credit or loans from companies that report to business credit agencies.
Another way to build up your business credit is by having vendors and suppliers extend your credit.
Also, you can also sign up for a service that will help you automatically pay your bills on time, improve your payment history and help you build good business credit.