Know the Difference Between Business and Personal Credit
As individuals, we spend years establishing and maintaining good personal credit histories. We know with a favorable credit rating is available to us at the stroke of a pen when obtaining a loan, credit card, or a new vehicle.
However, as a business owner, a positive credit rating is helpful, but does not allow you to maximize the true financing potential of your business.
More importantly, using personal credit for business financing puts your personal credit and personal assets at risk.
With business credit, you can acquire financing based on the creditworthiness of your company, rather than using your personal credit.
Here are four major ways business credit compares to personal credit:
Credit Inquiry – When you apply for financing using personal credit, you provide a social security number, allowing a creditor to review your report with a consumer credit agency. With business credit, you supply your company’s Federal Tax Identification Number or D&B D-U-N-S ® number, allowing a lender to review your report with a business credit bureau.
Credit File – As an individual, you have the ability to establish only one credit file that is tied to your social security number. With business credit, you have the ability to establish a credit file for each company that you own. Since each company has its own Federal Tax Identification Number, it can also establish its own individual business credit report.
Credit Capacity – Your capacity for credit is based on your ability to pay your personal financial obligations such as credit cards, student loans, auto loans, mortgages etc. With business credit, the capacity is based on totally different factors not related to you as an individual. These include company revenues, years in business, business assets, merchant transactions, payment history, industry risk, among others.
Credit Scores – The FICO® scoring system is regarded as the best risk assessment tool for lenders, banks, and creditors to use for individuals. However, with business credit, there is no single uniform risk assessment tool used in the industry. Instead, lenders, banks, and creditors rely on various scoring models and reports to determine the creditworthiness of a business.
As you can see, there are major differences between business and personal credit. As a business owner, it’s imperative to establish credit in your company’s name.
Ultimately, your business should be the one to qualify for the financing it needs based on its own creditworthiness, not yours.