Before you dive in:
- Take one step at a time to develop healthy financial habits
- Try find a balance between your personal life and your business
- Build good credit with Preparation, Patience, and Payment activity
Defining Personal and Business Credit
There are a few degrees of separation between personal credit and business credit and it starts with defining each one.
Any individual who wants to borrow money from lenders and creditors will require a good personal credit score to get the job done.
Personal credit means establishing good credit through disciplined personal financial habits, like paying bills on time, not taking on too much debt, and avoiding personal financial trap doors like loan foreclosure and bankruptcy.
By mixing different forms of credit like credit cards, student loans, and auto loans, for example, an individual can earn a good credit score, benefit from more credit opportunities and lower interest rates.
Anyone who launches a new entrepreneurial venture can likely count on using business credit monitoring to grow their company.
Business credit commences when a business is started and the owner begins paying business taxes, complete with an IRS Employee Identification Number (EIN).
With an EIN and reputable business in place, an entrepreneur can begin landing good credit to help pay for expenses related to opening a company.
Business Credit Versus Personal Credit
Credit scoring models
Personal credit scores are built on the FICO (Fair Isaac Corporation’s) credit scoring formula, comprising of five key factors:
- Payment history, credit utilization, length of history, credit inquiries, and overall mix of debt products.
- Personal credit scores range from 300 to 850, with the latter being the top personal credit score.
Business credit scores are built on three key credit holder factors:
- The owner’s credit history, the business in question, the owner’s background for any negative financial actions or legal filings.
- Business credit scores range from 0-to-100, with 100 being
the optimal credit score. It is often worthwhile exploring how to check your business credit score.
Correcting credit scores
Personal credit score consumers can force credit scoring agencies like Experian, Transunion, and Equifax, along with the private companies who contribute consumer financial data to those agencies, to fix credit report errors.
Business credit scores differ as credit report issuers aren’t obligated to respond to business credit report errors.
A personal credit report stays with the credit consumer for life. That’s not so with business credit reports, which expire when the business is sold or otherwise goes out of business.
Steps to Build Business Credit
If you follow these steps meticulously you can increase the chances of raising your credit score in a short amount of time and reaching your unique business credit goals:
Step #1 – Open a business checking account.
A business checking account should be opened immediately, using your company’s EIN. Use the account to pay the company’s bills and expenses in a timely manner. That will give you a track record of on-time payments, and leads to a good business credit score.
Step #2 – Open a business credit card.
Get a good business credit card with a solid interest rate and plenty of business perks, such as cashback and frequent travel rewards. This will help organize your expenses and help you build credit as you pay the monthly credit card bill on time.
Step #3 – Leverage traditional credit-scoring agencies that cater to business owners.
Each credit scoring agency offers a business credit account to entrepreneurs and business owners. Sign up when you launch your company and start building a sterling credit report right away.
Step #4 – Avoid sole proprietorship business models.
It’s much more efficient to run a business and build business credit when you structure your business as a limited liability corporation. Doing so places a wall between your personal credit and business credit.
Step #5 – Avoid using your Social Security number.
When obtaining business credit, refrain from using your Social Security number. Use your EIN instead, which helps keep your business and personal credit separate, and easier to manage.
Step #6. Use a Net 30 account.
This type of business credit enables an owner to get credit and gives that owner 30 days to repay the credit after receiving a bill from the creditor. They’re commonly offered by business vendors, like suppliers and other business partners.
The Takeaway on Business and Personal Credit
Just like your home life differs from your work life, business credit is clearly distinct from personal credit. Each needs to be addressed separately to achieve the most optimal outcomes on both sides of an individual’s business and personal life.
While receiving strong personal or business credit scores is ideal, there are still options for those who have less than ideal scores. There are many companies, such as Credibly, that offer business owners with bad credit a wide range of business loans. You can find plenty of business loan options that meet your unique business needs, where funds can be disbursed quickly and your business can continue to grow.