How Your Business Credit Differs From Your Personal Credit

Building credit is an important part of establishing oneself financially. The same is true for establishing your business. While both types of credit are built in similar ways, it is important for owners to establish business credit separately from their personal credit. Otherwise, banks and other lending institutions can have a hard time reaching decisions about whether or not to approve loan applications, and the terms of the loans acquired by one’s business will not be as generous as the might be.

Apart from being a record of payments and debts, business credit is a measure of a business’s health. Like personal credit, it serves to assure potential lenders that one will be able to repay loans on schedule and without hassle. It also demonstrates the total debt load carried by a business, enabling creditors to calculate one’s debt-to-income ratio before extending more. If business credit is not separated from the business owner’s credit, then personal household debts can throw off the calculation of that debt-to-income ratio.

This complicates things even if one’s personal credit is generally good, because it obscures the business’s actual ability to pay. This seems like it is only a problem if one is heavily in debt personally, but in actuality it can hurt a business even when the owner does not carry much personal debt. For lenders, combined credit changes the kinds of loans that they will offer. Since business loans are structured differently from personal loans, combining personal and business credit will reduce the available options for loans.

To maintain separate credit, a business needs to start with a separate bank account. This account should host the business’s funds, and all received income should run through it. Once that is set up, the business needs to begin establishing its own credit in the same way that a person would. This means taking on debt and paying it back off. Leasing equipment can be one way to do this, but it is a choice that is not open to all businesses. Keeping a credit card in your business’s name is an easy alternative that fits most small businesses well.

Once your business establishes its credit through the use of a small instrument like a credit card, you can expand it further by renting office space, putting utilities in the business’s name, or through any other methods you used when establishing your personal credit. Remember to keep your personal expenses from creeping into your business purchases, though.

Finally, consider the use of revolving credit accounts and other financial instruments to keep your credit activity active. Like personal credit, activity is a major sign of healthy business credit, so it can be easier to obtain loans if there is a moderate amount of activity on your credit report.