What Small Business Owners Need to Know About Credit

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Many small business owners tap their personal credit when first starting their businesses or during downturns. However, your business can also have its own—completely separate—credit profile. Building business credit can help save you money and grow your company. But for many small business owners, personal credit can still be a major factor in qualifying for business financing.

The Difference Between Personal and Business Credit

Your personal credit depends on your credit reports from the major consumer credit bureaus—Equifax, Experian and TransUnion. Your creditors, such as lenders and credit card issuers, report your account information to the credit bureaus. Then, your FICO^® Scores are based on those credit reports.

Similarly, once a business is established as a limited liability company (LLC) or corporation, it can also establish its own business credit file. Business credit reports are managed by Dun & Bradstreet (D&B), Equifax and Experian—the latter two have separate consumer and commercial credit databases.

A business's creditors and vendors can report its accounts and payments to the business credit bureaus, which can then create business credit reports. There are also business credit scores, such as the FICO Small Business Scoring Service℠ (FICO SBSS), that creditors can use to evaluate the creditworthiness of a business.

Unlike consumer FICO Scores, which range from 300 to 850, the FICO SBSS score ranges from 0 to 300 and is used by many small business lenders to evaluate applications for other types of business financing.

How Business Credit Can Help Business Owners

Establishing and building your company's business credit can help the company:

Obtain more favorable business loans and lines of credit
Get lower rates for business insurance
Receive longer terms from vendors and suppliers
Qualify for government and corporate contracts
Raise money from investors

In short, a good business credit score can help you save money, smooth your cash flow and grow the business.

In some cases, your business's financial statements and history with suppliers or partners may be more important than its business credit scores. But establishing a good business credit score can still give you a leg up in the long run.

Why Your Personal Credit Still Matters

Over time, some companies grow to the point that creditors offer them loans or lines of credit based solely on the business's finances and credit. However, that's not the case for most small businesses.

While a strong business credit profile could help qualify for better financing, know that:

Many lenders will still check all the business owners' personal credit
There may be minimum consumer FICO^® Score requirements for all business owners
Some business credit scores incorporate the owners' personal credit

Even if your business qualifies for a loan without a personal credit check, you may still need to sign a personal guarantee. The guarantee means you're personally responsible for the debt if the business can't afford to make payments.

Keep Your Business and Personal Finances Separate

As a small business owner, your business's success may be deeply intertwined with your personal finances. However, separating your business's finances from your personal finances is important.

For example, if you use a personal credit card for business expenses, you may have a high utilization rate that's hurting your personal FICO^® Scores. You may have trouble qualifying or receive less favorable rates on a credit card or loan as a result, even if it's for personal use. Having a business credit card or business line of credit that doesn't get reported to the consumer credit bureaus could be a better option.

Similarities Between Your Business and Personal Credit

Your business and personal credit reports are completely separate, but there are some similarities to the processes. Here's a quick overview.

Business Credit

Establish a business structure (such as an LLC or corporation)
Register your business with D&B
Open credit and term accounts that are reported to the business credit bureaus
Make your loan payments on time
Make net-term payments on time or early

Personal Credit

Have a credit card or loan that's reported to the consumer credit bureaus
Make your payments on time
Only use a small portion of your available credit on revolving accounts

Business and personal credit scores both try to predict the likelihood that a borrower will miss a payment in the future. With this in mind, it makes sense that having a history of on-time payments is important.

With a good understanding of why business and personal credit can be important for small business owners, you can continue your research online. If you want to learn more about personal credit, myFICO's resources on consumer credit can help.

Louis DeNicola

Louis DeNicola is a finance writer based in Oakland, California. He specializes in consumer credit, personal finance, and small business finance, and loves helping people find ways to save money. In addition to FICO, Louis works with a variety of financial services firms, credit bureaus, and educational websites, including LendingTree, Credit Karma, and Experian.