Whether you are an average American or a businessperson, credit is something we all wrestle with. When you are doing business, you have to deal with both business credit and personal credit. As a small business owner, especially sole proprietors —an individual who owns an unincorporated business by himself or herself— your business finances might be linked to your personal credit. While it might seem easier to deal with one set of accounts, it’s a mistake to separate your business expenses from your personal expenses. That can cause confusion in your finances, that will affect your budgeting or your ability to assess your profit-loss precisely.
In other words, there are key differences between business credit and personal credit. In this article, we will analyze both and we will learn the difference between business and personal credit.
What is Credit?
Before we can delve into the differences between business and personal credit, we must first understand credit. So, what is credit?
Credit, in its simplest form, is money you borrow from a guarantor to purchase goods or services. You agree to pay back on a later date with applicable fees and interests.
Credit can then be further broken down into many different types, such as:
Revolving credit – A line of credit that is issued with a maximum credit limit. You can have charges up to that specified limit. You must make monthly payments to pay off the balances you’ve accrued.
Installment credit – A fixed loan that is issued and you agree to pay it back in installment at a fixed payment over a set period of time.
Trade credit – An agreement where a customer can purchase goods on credit and agrees to pays the supplier or vendor at a later date. Usually, when the goods are delivered.
Here you can learn more about the different types of credit mentioned above and see examples.
Business Credit and Personal Credit: Key differences
Now that we have unpacked the different dynamics of credit, and we have a better understanding of credit itself, lets us focus on the difference between business and personal credit. There are many similarities between them, for example, the way you build personal and business credit is essentially the same: you just have to pay your bills on time. However, there are some key differences that distinguish them apart.
1. The way they are established
Establishing personal credit is something many of us have done in the past and will do in the future. You have to go to a bank or a credit card provider, and apply to open an account or a credit card. Through this process, the provider will ask for your Social Security Number (SSN). After you comply and you are approved, you have this account open on your personal credit because now it’s linked to your personal information (SSN).
With business credit, however, you have to first register your business as a Limited Liability Company (LLC) and apply for an Employer Identification Number (EIN) from the IRS. Then, you will have to apply for a DUNS number, a unique nine-digit number linked to the physical location of your business. It’s provided by Dunn & Bradstreet, one of the three big Business Credit Bureaus.
Once that process is completed, you must head to your bank and open two separate accounts for your business using your newly obtained EIN number: a business checking and a saving accounts. Remember to apply for a business card, which will help you build credit.
Now you can start building your business credit. There are several ways to do it. We insist that it’s key to separate your personal expenses from those of your company; therefore you should also avoid using your personal credit cards for your company’s expenses, and vice-versa. And don’t forget to deposit all the cash your company earns in your company account. Another way to build business credit is to ask for a loan from the bank you have your accounts with. You can also establish trade credit with vendors and suppliers: remember to pay your bills on time, and to make sure all of this is being reported to the Business Credit Bureaus. By doing so, you have successfully established business credit. Do you want more advice? Learn here all you need to build your business credit, and here how to do it in a record time.
2. The way your credit score is calculated
Another fundamental difference between personal and business credit is how they generate your credit score. Your personal credit score ranges from 300 to 850. This number is based on information collected from your credit report by the three major consumer credit bureaus: Equifax, Experian, and the TransUnion. These credit-reporting bureaus calculate your score using the Fico algorithm. With the algorithm, they are able to look at the number of accounts you have, the type of accounts, your credit history length, your available credit, and your payment history. With all this information they generate your credit score.
Although FICO is not a credit reporting bureau, it also generates its own score, called the FICO score. This score is important because it is what lenders evaluate when you apply for a mortgage or car loan. It helps determine the interest rate offered on your loan.
Unlike personal credit score, business credit score is not standardized. Each business credit bureau (Dunn & Bradstreet, Equifax, and Experian) calculate business credit scores differently.
Dunn & Bradstreet – Focuses only on business credit, or how your business interacts with your vendors and suppliers. It uses a Paydax system to generate a score from 0 to 100. They look at the following: data submitted by suppliers, payment history, and public records. Then they create a business profile, as well as a credit score and a financial stress score. With this information, they can project how a business will perform over the next year.
Equifax Credit – Collects data that shows how a small business makes their credit card and loans payments. The Equifax credit score includes payment index, credit risk score, and business failure score.
The Payment Index also scores on a scale of 100, showing how many of your company’s payments were made on time. The Credit Risk Score analyzes the possibility of your business becoming extremely late on its payments. Finally, the Business Failure Score measures the probability of your business closing.
Experian – Collects credit information from both lenders and business vendors. It takes into account your business credit score, payment trends, account histories, and public records. Just like Dunn & Bradstreet, it offers a credit score from 0 to 100; however, it differs because it doesn’t just focus on payment history.
3. The way they deal with privacy and accessibility
The final two key differences are privacy and accessibility. With your personal credit score or report, no one is allowed to see it except for you and a select few. Your business credit score/report is open to the public. Anyone can get access to it if they pay the necessary fees.
By law, once a year, you are able to request a copy of your personal credit report from all of the credit bureaus. You can also request your FICO score. Not so with business credit reports: to gain access to your report, you have to pay the necessary fee to each of the business reporting bureaus.
Learn here how to read your credit report
4. The way they deal with security and protection
When it comes to security and protection features, your personal credit card comes with credit protection for individual consumers. Those features don’t always apply to businesses. In other words, a consumer credit card offers an extra level of protection that doesn’t come with your business credit card.
Also, for individual consumers, the CARD Act requires that your credit card issuer give you at least 45 days warning before changing things like late payment fees or your interest rate. However, there are no caps on the interest rates business card issuers can set, and there are credit terms that can change for business credit without warning.
The security level and protection features also differ in your business credit report and your personal credit report. There are fewer legal protections in your business credit report. By law, you have the right dispute anything on your personal credit report and request incorrect and negative entries to be removed. But there are no such laws when it comes to your business credit report: if you spot an error or inaccuracies, you could have a much tougher time getting those dealt with. You can challenge the discrepancies with the business bureau that created your report, but they don’t have the obligation to respond.
Business Credit and Personal Credit: How They Are Connected
When you apply for a business loan or a business credit card, your lender will take into account your personal credit history. This will determine your chances of approval, the amount of credit extended to you, the terms and conditions, and most importantly, the interest rate you will receive. So it’s vital that you work on your individual credit score and report before you apply for a small business loan or a credit card for your business.
Your lender will also look up at your business credit history and score. Usually, this type of check is more rigorous. Your lender will look into a series of items, which are not a part of your personal credit score:
- Verification of your business
- Public records for your business
- Collections and data management
- Billing tracking
Make sure you know all this information when you apply for a business loan. It will also help identify the lenders and the types of loans that offer the most favorable terms for your situation.
To sum up, the fundamental difference between business credit and personal credit is that the second one is any form of credit that is linked to your personal information, like your social security number. Business credit, on the other hand, is any form of credit linked to your business through your tax ID, and its use by vendors and guarantors to rate your business ability make payments and borrow money.
And talking about loans, if you think this is the right time to apply for one, simply submit your online application. It will take you only a few minutes and it won’t affect your credit score. If you are prequalified, one of our business loans specialists will contact you to explain your options. You could be very close to the loan that will make your business thrive!