Business Credit vs. Personal Credit

By now, you probably know about the importance of good credit in qualifying for low interest rates, getting a loan, and the various other impacts a good FICO score can have on your finances. But unless you’re already a business owner, you may not know that there is a credit score associated with your business too.

Much like personal credit, business credit is an important metric lenders use to assess your aptitude as a borrower. However, there are significant differences between the two, and aspiring entrepreneurs need to be aware of the importance of business credit to help protect their professional and personal finances.

What is business credit?

Just like personal credit, business credit is a measurement of your likelihood to pay back lenders based on previous payment history. As you establish a business, there may come a time when you need to access credit to cover unexpected costs or continue growing, at which point lenders will assess your business credit before accepting you for a loan.

Business credit has several things in common with personal credit, but it is important to recognize the features that make each unique. Personal credit is a little easier to understand at first, since it is reported by three well-known credit agencies. Business credit, on the other hand, gets a little more complicated due to its unique reporting standards.

Here are some of the different agencies that report business credit scores and the scales they use:

• Dun & Bradstreet PAYDEX (0 to 100)
• Equifax Business Failure Score (1,000 to 1,610), Credit Risk Score (101 to 992) and Payment Index (0 to 100)
• Experian IntelliScore Plus (0 to 100)
• FICO SBSS (0 to 300)

If you’re confused, you’re not alone. Many people’s first impulse is to shirk away from building business credit, since it’s yet another financial system to learn. But, in reality, business credit is an essential element of entrepreneurship and should not be ignored.

Why is business credit important?

Building business credit might seem overly complicated, and like just another unnecessary headache — after all, you already have personal credit to borrow against, so why bother with business credit?

The most significant reason to build business credit separate from personal credit is to minimize personal risk exposure. If you borrow on personal credit for your business any number of unforeseeable financial crises would not only tank the business, but also your personal credit. It’s better to avoid putting all your eggs in one basket. That way business prosperity doesn’t negatively mark your personal credit.

It’s also important to point out that business loans are notoriously hard to get. You will have a much better chance for approval if you bolster your business credit over time — uninhibited by periodic personal credit hiccups.

Even if you are feeling particularly confident in your personal credit, and its lasting power to fund your business, there is still another significant reason to establish business credit independently: anyone can check your business credit without authorization. For personal credit, you have to give permission to view it, but with business credit anyone can check it at any time.

You never know who will check your credit, and this score is often perceived as a direct reflection of your professionalism. With the added threat of uninvited query, you don’t want to run the risk of presenting an unfavorable business image due to a personal credit score dip.

How to start building business credit

When it comes to building business credit, you have to walk before you run. The first step is to incorporate — meaning you must designate the business as a separate legal entity from yourself. Incorporating is an important step for various legal and financial reasons, and a necessary step toward establishing business credit.

A common rookie mistake new business owners make is funding their business expenses through personal lines of credit or personal credit cards. This actually makes them financially liable for business actions. Not to mention, if you conflate your business and personal credit, lending approval, credit utilization, payment history and other factors will equally affect your standing and that of your business. It’s best to separate the business from your personal credit to eliminate the threat of exposing personal finances to business actions.

Next, you will need to establish business financing. For new business owners, the most common and convenient way to build business financing is to get a business credit card. Just like with personal credit, a starter credit card that you can reliably payoff is a good way to get a foothold on establishing business credit. Otherwise, after you establish rapport with vendors, you can ask them to report your illustrious payment history to credit agencies to build up your score.

Treat your business credit score with care

Overall, a good rule of thumb is to practice the same careful credit habits you would exercise for your personal score: keep your credit utilization under 30 percent, pay debts on time (or even early), and avoid delinquency.

If you enact some of these best practices, you are sure to improve your business credit. But sometimes you need a little jumpstart to get your personal credit score up to snuff. Professional credit repair services are a good place to start. Credit repair professionals can review your credit report and help you work to remove inaccurate or misleading items — resulting in a more advantageous reflection of your aptitude as a borrower.

Backed by over 26 years of service, Lexington Law leverages industry-leading tools and legal expertise to remove unfair, inaccurate, and unsubstantiated credit report items. Last year alone, clients saw 9,000,000 negative items removed from their credit reports. Contact Lexington Law for a free credit repair consultation, and start on the path toward better credit.