When you start or run a business, one of the most important financial distinctions you’ll need to understand is the difference between personal vs. business credit. Many small business owners often mix up these two types of credit, but understanding the key differences is crucial for financial success, especially when it comes to securing loans, managing your cash flow, and protecting your personal assets. In this article, we will break down the differences, key benefits, and why separating business credit vs personal credit is necessary for every owner.
What Is Personal Credit?
Personal credit refers to the creditworthiness of an individual. It is based on how well you manage your personal finances, such as paying bills, making debt payments on time, and maintaining low credit card balances. Your personal credit score is a reflection of this and ranges from 300 to 850. The most commonly used personal credit scoring model is FICO, where a higher score suggests you’re a responsible borrower.
Lenders, landlords, and credit card companies typically rely on your personal credit score when deciding whether to approve loans or credit. It plays a crucial role in your ability to obtain financing, whether it’s a mortgage, car loan, or personal loan.
What Is Business Credit?
On the other hand, business credit is separate from personal credit and refers to a business’s ability to secure financing based on the business’s credit history and financial behavior. It’s built in a similar way to personal credit, with the primary difference being that business credit evaluates the company itself, rather than an individual.
Establishing business credit allows your company to take out loans, open lines of credit, and gain financing without putting your personal assets on the line. In other words, a strong business credit profile can help separate your personal finances from your business finances, providing peace of mind in case your business faces financial difficulties.
Key Differences Between Business and Personal Credit
1. Who It Affects
- Personal credit affects your personal life and finances. If you have a poor personal credit score, it could affect your ability to get approved for personal loans, mortgages, and credit cards.
- Business credit affects your company. It determines whether you can get financing, supplier credit, and even business insurance.
2. Credit Reporting Agencies
- Personal credit is reported by agencies like Experian, Equifax, and TransUnion, which track your individual credit behavior.
- Business credit is reported by agencies like Dun & Bradstreet, Equifax Business, and Experian Business. These agencies track the financial activity of your business.
3. Impact on Liability
- Personal credit can impact your personal assets, especially if you personally guarantee business loans or credit.
- Business credit helps protect your personal assets. A strong business credit profile may allow you to secure funding without needing a personal guarantee.
4. Reporting Frequency
- Personal credit scores are updated based on your personal financial activity, and these reports are generally updated monthly.
- Business credit reports can be updated more frequently, depending on the size and activity of your business. Some may track payments on a weekly basis.
5. Interest Rates and Terms
- Personal credit typically results in personal loans that have varying interest rates depending on your score.
- Business credit may offer more favorable terms for business loans. A good business credit score may help you negotiate better interest rates for business financing.
Benefits of Building Business and Personal Credit
- Easier Financing: A strong business credit score makes it easier to qualify for loans and lines of credit to help grow your business.
- Separate Personal Finances: Business credit helps separate personal and business finances, protecting your personal assets in case of financial challenges.
- Vendor Relationships: Building business credit can improve relationships with suppliers and vendors, making it easier to negotiate payment terms and get better deals.
- Lower Interest Rates: Just like personal credit, having a solid business credit score allows you to qualify for lower interest rates on loans and credit.
Personal vs. Business Credit Scores
How Personal Credit Scores Work
A personal credit score is calculated based on your credit history, which includes:
- Payment history (35%)
- Amount owed (30%)
- Length of credit history (15%)
- Types of credit in use (10%)
- New credit (10%)
A score of 700 or higher is typically considered good, though the higher the score, the better.
How Business Credit Scores Work
A business credit score is calculated differently and takes into account the company’s financial activity, including:
- Payment history: How consistently your business pays bills and debts.
- Credit utilization: The percentage of your available credit that your business uses.
- Credit inquiries: The number of times your business applies for credit.
- Size and age of the business: Older, more established businesses tend to have stronger credit profiles.
The business credit score is typically on a scale from 0 to 100, with scores above 80 considered excellent.
Why Do I Need Business Credit?
Establishing and building business credit offers several advantages:
- Access to Funding: Without solid business credit, your ability to secure loans for growth, inventory, or emergencies may be limited.
- Separation of Finances: Separating personal and business credit protects your personal finances, so you’re not personally liable for business debts.
- Lower Risk: Building business credit helps reduce the financial risk of your business by creating a safety net of available funds when needed.
- Faster Loan Approvals: Having a well-established business credit profile may speed up loan approval processes for business needs.
Is Business Credit Different from Personal Credit?
Yes, business credit is indeed different from personal credit. The major distinction is that business credit focuses on the financial health of the business, while personal credit is concerned with the individual’s financial responsibility. As a business owner, it’s important to separate the two to avoid the risk of personal liability and to ensure your business can grow independently of your personal finances.
Vyde: The Best Accounting Partner for Tax Season and Building Business Credit
Managing personal vs. business credit can be overwhelming, but with the right accounting partner, you can ensure that both your personal and business credit are on track. Vyde is the ideal accounting partner for tax season and can help you build a strong business credit profile for easier business loan approval. Their expert guidance and strategic approach can ensure that you separate your personal and business finances, protecting both your personal assets and helping you unlock the full potential of your business.
By working with Vyde, you’ll have the support needed to manage your finances, improve your credit standing, and ultimately secure the financing your business needs to thrive.
Don’t wait until the last minute to start building your business credit. Contact Vyde today to learn how their expert accounting services can help you navigate the complexities of personal vs. business credit and set your business up for success! Let Vyde guide you toward securing the funding your business deserves.
