In theory, personal credit and business credit are entirely separate systems. They involve different credit scores and rely on different credit bureaus, which compile different credit reports. As a result, it’s easy to think they don’t influence each other.
In reality, it’s possible to keep your personal and business credit separate, but it doesn’t happen automatically. In fact, your personal credit will often affect your business credit unless you take steps to prevent it. Here’s what you should know about how it all works.
How Your Personal Credit and Business Credit Are Connected
Your personal and business credit scores usually don’t affect each other directly, but they’re still surprisingly connected. That’s especially true for sole proprietors, who aren’t legally separate from their business entities.
Typically, they connect in indirect ways. For example, new business owners start with no business credit history, making it difficult to qualify for accounts in their company’s name. As a result, they rely on their personal credit to qualify for business accounts.
In that case, your personal credit doesn’t directly affect your business credit, but it does enable you to qualify for the accounts you need to build business credit. If you had a bad credit score personally, it would limit your ability to build business credit.
Once you’ve established your business credit, it can also have an impact on your personal credit. Most commonly, that occurs when you have negative activity on a business credit account.
Negative activity refers to anything that will damage your overall creditworthiness, such as missing payments or defaulting on an account. Business creditors will often report these activities to a business and personal credit bureau, damaging both scores.
As mentioned previously, sole proprietors are especially vulnerable to that. You can limit that risk by establishing a separate legal entity and using its Employer Identification Number (EIN) to open its credit accounts instead of your Social Security Number (SSN).
3 Ways That Personal Credit Can Affect Business Credit
Contrary to popular belief, your personal credit affects your business credit surprisingly often. However, it’s typically in an indirect way, such as when you’re applying for business credit. Let’s look at some common examples.
1. Using Personal Credit Score to Qualify for Business Credit Cards
As a new small business owner, you generally don’t have a business credit score. Since your prospective business credit card issuer can’t use it to assess your company’s creditworthiness, they'll check your personal credit score instead.
That’s especially common when you’re a sole proprietor. You’ll know that’s an issuer's plan when they ask you to provide your SSN during the application process. They need it to initiate a hard inquiry and check your score.
With a good credit score and report, you can overcome a lack of business credit. As a result, your personal credit history can often make or break your company’s ability to secure a business card in its early days.
2. Using Personal Credit Score to Secure SBA Loans
Business loans are one of the hardest types of commercial financing to qualify for, especially if you want a reasonable interest rate. They can be tough to secure even after you’ve established a reasonably positive business credit history.
In many cases, having a good personal credit score is necessary to make the cut. For example, Small Business Administration (SBA) lenders usually check your personal and business credit scores when you apply for a standard 7(a) loan.
To qualify, you’ll usually need a personal credit score of at least 650, and some lenders will require a minimum score as high as 700.
3. Signing a Personal Guarantee to Open Vendor Tradelines
One of the most common ways business owners build credit is to open vendor tradelines. These trade credit accounts usually offer extended repayment terms at a specific vendor, such as net 30 terms at an office supply company.
While these credit accounts may or may not help your cash flow, they’re relatively easy to qualify for without business credit history. However, sometimes you’ll need to sign a personal guarantee to secure them.
That gives the vendor the right to pursue your personal assets to recover their losses if you ever default on the account, which makes them much more likely to approve your application.
Separate Business Credit From Personal Credit
Using your personal credit to apply for business financing is often tempting, especially as a new business owner. If you have a good score, it makes it much easier to secure helpful accounts like business credit cards and vendor tradelines.
However, it also tends to increase your risk significantly. If your business struggles to keep up with its debts, it’s much more likely to affect your personal credit report and finances.
For example, as we discuss in our How to Build Business Credit With Bad Personal Credit article, Chase reports all negative activity on their business credit cards to the personal credit bureaus, including any late payments.
If you actually default on a business account you opened with your personal SSN, the issuer may also pursue your personal assets to recoup their assets. If you signed a personal guarantee, that would be well within their rights.
You may be confident in your business, but remember that roughly 20% of businesses fail within their first two years, often due to circ*mstances beyond their control. Even if you do everything right, something unexpected could cause you significant trouble.
As a result, it’s often better to separate your personal and business credit by opening your company’s financing under its name instead of your own.
How To Build Business Credit Without Using Personal Credit
While it is possible to establish business credit without relying on your personal score, it requires a little extra work. As we explore in our article, How To Build Business Credit Without Using Personal Credit, here are some of the best steps to take:
- Establish a separate business entity: Sole proprietorships and partnerships aren’t legally distinct from their owners. Ideally, you should structure your company as something that is, such as a corporation or LLC.
- Create a distinct business presence: In addition to creating a separate legal entity, you should reaffirm your company’s distinction from yourself by giving it its own business bank account, phone number, mailing address, and tax ID.
- Open tradelines in your business’s name: Once your business is established as its own entity, start applying for accounts in its name using its EIN. Typically, it’s best to start with vendor tradelines and work your way up to more challenging business accounts.
- Make early payments and keep credit utilization low: Building business credit is a lot like building personal credit. The most important factors for most credit scores are to make your payments on time and avoid accruing balances higher than you can manage.
If you’d like to build business credit without taking on more business debt, one great option is to sign up for eCredable Business Lift. Our program can report your existing expenses to the business credit bureaus and transform them into vendor tradelines.
However you work toward better business credit, you should monitor your progress to make sure things are going smoothly.
Unfortunately, you aren’t guaranteed access to a free annual business credit report, but you can buy one from BusinessCreditReports.com.
Things To Consider When Taking Out Business Loans Based on Personal Credit
While it’s safest to keep your personal and business credit separate, using your personal score to open business accounts is still a perfectly legitimate approach, especially for new business owners.
If you want to go that route, just make sure you’re aware of the increased risks. As we’ve discussed, your business creditors may report any negative activity in your account to a consumer credit bureau, which can damage your score.
Similarly, they may come after your personal assets to recoup their losses if you ever default. If you signed a personal guarantee, you won’t be able to stop them.
To avoid those risks, consider signing up for eCredable instead. You can turn an unlimited number of your recurring expenses into vendor tradelines for a subscription of just $19.95 per month, which we’ll also report to the business credit bureaus.
In addition, we can report up to 24 months of payment history for each account, giving you the opportunity to establish years of business credit history overnight.
As we discuss in our article on How to Build Business Credit in 30 Days, that’s one of the only ways to rapidly increase your score.
Sign up for eCredable today and take the shortcut to better business credit!
FAQs
Can You Start an LLC With Bad Personal Credit?
Your personal credit score has no effect on your ability to start an LLC because there’s no personal credit check involved in the process. As a result, you should be able to start one even if you have bad personal credit.
Do Personal Credit Scores Affect Business Credit Scores?
Personal credit scores don’t affect business credit scores directly. Your personal activities rarely, if ever, show up in your business credit reports.
However, your personal credit score can affect your business credit score indirectly. Most notably, many new business owners use their personal credit to qualify for their first few business credit accounts, which they need to start building business credit.
Do Business Loans Look at Personal Credit?
Some lenders will check your personal credit score when you apply for a small business loan. For example, financial institutions that work with the SBA often want to see a personal credit score of at least 650 before they’ll consider lending to a business owner.
However, there are exceptions. Some business lenders will ignore your personal credit in favor of your business credit if your company is well established.
Can I Get a Business Loan if My Personal Credit Is Bad?
You can get a business loan with bad personal credit if you target creditors with lower standards, such as an online lender. Providing some kind of collateral and having strong finances will increase your chances.
Alternatively, you can get a business loan despite your bad personal credit by applying under your business’s tax ID. However, you’ll need to have good business credit and a well-established business entity to succeed with that approach.
