As a business owner, or someone who is considering starting your own business, you may have wondered: does your personal credit score impact your business, and vice versa? The answer is a bit complicated.
To start though, let’s clarify one thing. Your personal credit report reflects your payment history as a private consumer while your business credit file reflects your payments on loans and other actions you have taken on behalf of your business. While the two reports aren’t directly linked to one another, it’s worth noting that many lenders do review personal credit reports when applicants apply for business loans and lines of credit. This is especially true of sole proprietors, who don’t legally separate their personal and business finances, and those who sign a personal guarantee for a business loan.
Let’s take a closer look at personal credit vs. business credit:
1.) How Do Business Credit Scores Differ from Personal Credit Scores?
If you’ve ever obtained a copy of your personal credit report, you’re probably familiar with the FICO score. FICO stands for Fair, Isaac, and Company, the organization that developed the modern credit scoring model. A credit score typically ranges from 300 to 850, with higher scores representing the best rating. FICO remains the dominant scoring model across all major credit reporting agencies.
No single scoring system exists for business credit files, which means that each business credit reporting agency can create its own scoring method. Dun & Bradstreet, the largest business credit reporting agency, rates businesses based on a viability rating, delinquency predictor score, and financial stress score. Experian, the second-largest, ranks on financial stability risk and Experian “Intelliscore”. Typically, reporting agencies create and maintain a credit score for businesses based on the industry, how much debt the business carries, and whether it pays its bills on time.
2.) What Identifying Information is on Personal Credit Reports vs. Business Credit Reports?
Besides name, address, and other demographic information, consumer credit reporting agencies identify people by their social security number.
Business credit reporting agencies on the other hand, identify companies by an employer identification number (EIN). The same person can have more than one EIN if he or she owns more than one business.
3.) How is Borrowing Capacity Determined for Consumers vs. Business Owners?
Business owners typically have a need to borrow significantly more money than personal consumers do. Unless you operate as a sole proprietor, your business credit file remains separate from your individual credit file. You will also have separate business credit files for every company you own. However, the lines between your personal and business credit files can blur if you take out a business loan or business line of credit that requires you to make a personal guarantee.
So what is a personal guarantee? If you obtain credit on behalf of your business and the lender asks you to include a personal guarantee, it means that you promise to pay the debt with your own resources if the company cannot pay it. The concept is similar to co-signing a loan for someone else. When you co-sign a loan, the primary borrower is responsible for the debt, but you, as the co-signer, are legally responsible to pay if they default on the loan for any reason. Similarly, if you make a personal guarantee when borrowing money for your business, the creditor can attempt to seize your personal assets if you default on the loan or business line of credit.
It’s also important to understand that providing a personal guarantee means that your business structure can’t protect you if the business doesn’t have the necessary funds for repayment. This is true whether you form the company as a Limited Liability Company (LLC), S-Corporation, or C-Corporation. While these types of business formations will still protect your personal assets if someone sues your business, they won’t prevent creditors from trying to take over personal assets if you default on a loan with a personal guarantee.
4.) Can a Business Credit Card Impact Your Personal Credit Score?
In short answer, yes. Lenders that issue credit cards sometimes report a customer’s payment history to both consumer and personal credit reporting agencies, even when the card is only used for a business. If you want to build your business credit score and ensure that your business credit history and your personal credit history remain separate, you may want to consider applying for a business loan or a business line of credit instead of taking out a business credit card.
Before seeking any kind of financing for your business, whether it be a business credit card, loan, or line of credit, it’s important to carefully consider your options and stay on track with your payments once credit is extended. And as a business owner, reviewing both your personal and business credit files at least once a year will help you to see how they may be impacting one another, and will also allow you a chance to spot and correct any inaccuracies.
If you have any questions about securing a loan or line of credit for your Massachusetts or Rhode Island business, or if you need help determining which type of financing would be best for your company, don’t hesitate to reach out to us. Our business lending experts would be happy to assist you.