As a small business owner, you may have considered opening a small business line of credit to help fund growth, cover cash flow gaps or take care of other business expenses. A business line of credit can help you keep your business running smoothly, but does it affect your personal credit?
It’s important to understand the relationship between business funding and your personal and business credit scores. This can help protect your personal finances and accelerate business growth.
Does a Business Line of Credit Affect Personal Credit?
A business line of credit typically won’t directly affect your personal credit score. Small business lines of credit, small business loans, small business credit cards and other debts your business is liable for, won’t usually show up on your personal credit report. Though there are certain situations where your score can be impacted. This can depend on many factors such as your business structure, your lender’s requirements and your repayment history.
When Does a Business Line of Credit Affect Personal Credit?
While business credit and personal credit are usually separate, there are a few circumstances where a business line of credit can affect your personal score.
Business structure. Sole proprietorships are not separate legal entities. This means that the business owner is responsible for the repayment of all debts. If you’re a sole proprietor, your personal credit can be directly impacted by a business line of credit — because there is no separation between your personal assets and liabilities and your business’s.
Lenders. When applying for a business line of credit, a lender may check your personal credit score. Some lenders may do a hard credit check, which could ding your personal score by a few points. Others may do a soft credit check which won’t affect your score or appear on your credit report.
Personal guarantees. A lender may also require a personal guarantee from the business owner. This means, if the business fails to repay, you are personally responsible for it. If you make late payments or your line of credit goes into default and gets sent to collections, it can negatively affect your personal credit score.
What Is the Difference Between Business Credit and Personal Credit?
There are some big differences between business and personal credit. Your business’s credit score is tied to its EIN (employer identification number) and it’s a measure of your business’s creditworthiness. Your personal credit score is tied to your social security number and it’s a measure of your creditworthiness. Here are a few examples of other differences.
Purpose. Business and personal credit scores are used by lenders, credit card issuers and insurance companies to evaluate financial health. A good business credit score can also help you attract investors and get better deals with your vendors.
Credit reporting agencies. Different credit bureaus and reporting agencies track business and personal credit. Business credit reports are offered by agencies such as Dun & Bradstreet, Experian Business, and Equifax Business. Personal credit reports, on the other hand, are offered by Experian, Equifax and TransUnion.
How they’re calculated. Both business and personal credit history are impacted by things like payment history, credit utilization ratio, and credit age and mix. Business credit scores are also impacted by the size and age of the business, public records and the riskiness of the industry.
Scores. Personal credit scores (commonly known as FICO scores) range from 300 to 850. Business credit scores on the other hand can vary depending on which credit reporting agency you go to.
Can My Personal Credit Score Affect My Eligibility for a Business Line of Credit?
Yes, your personal credit score can influence whether or not you get approved for a line of credit especially if you’re a new business or you don’t have an established business credit history. Lenders may check the business owner’s personal credit score in order to determine approval.
Business credit can help you grow your business. A good business credit score is a sign of healthy business finances. It can help you lower your interest rates, get higher credit limits, protect your personal credit and attract investors.
How Do I Build Business Credit?
Building business credit isn’t complicated. Here’s what you should know.
Make on-time payments. Your repayment history has a big impact on your business credit score. Making payments on time and in full can help you establish a positive track record. Late or missed payments may damage your score.
Keep an eye on your credit utilization ratio. You should keep an eye on the amount of business debt you carry. Maxing out your small business lines of credit or having too many loans can negatively impact your score.
Get business funding. Small business credit cards, small business loans or a small business line of credit can help you establish a business credit history. Many small business owners use personal credit cards or take on personal debt to fund their business. Not only does this not help build business credit, but it puts your personal financial situation on the line.
DISCLAIMER: This content is for educational and informational purposes only, and is not intended as financial, investment, or legal advice.