If you're beginning a small business, freelancing profession, or simply setting up a side job, you may be considering getting business credit and expanding your operations.
Business credit in credit card form allows you to earn rewards while covering the operating expenses. Furthermore, placing all your business transactions on a business credit card might make tax filing easier. Therefore, it is critical to keep your company and personal costs separate. If you have a poor credit history, it is important for you to understand the true cost of a credit line down to the penny. This is a good way to keep yourself from overspending and going into debt.
Moreover, keeping business and personal costs separate does not imply that your business and personal credit will not impact one another.
For example, many consumers are unaware that some credit issuers record business credit accounts to consumer credit agencies, which implies that your business credit might affect your overall credit score.
Let's examine how your business credit affects your personal credit—and vice-versa.
Table of Content:
- How are Personal and Business Credit different?
- Personal Credit Scores vs. Business Credit Scores
- What impact does my Personal Credit have on my Business Credit?
- What impact does my Business Credit have on my Personal Credit?
- How to create the perfect balance between both Credit Scores?
- Bottom Line
- Frequently Asked Questions
- How Deskera Can Assist You?
Let's Start!
How are Personal and Business Credit different?
Let's understand!
Your Social Security number links with your personal credit. Your Tax ID Number, which the authorities use to identify your company for accounting purposes, is linked to your business credit record.
So you may apply for an EIN online and get it nearly immediately.
Experian and Equifax are the top credit rating agencies that monitor your personal credit history. They also offer commercial credit reporting services. As a result, your corporate credit report will differ from your private credit report.
There are credit monitoring firms that solely deal with companies, the largest and most well-known of which is Dun & Bradstreet. If you have multiple companies, each with its own EIN can have its credit score.
Personal Credit Scores vs. Business Credit Scores
Your personal credit is typically summed up into a single figure that creditors may view at a glance. FICO is the most widely utilized technique for calculating credit scores. Commercial credit agencies assess and report uniquely; companies have no comparable service.
The most crucial elements for business credit are how you manage your payments, how much borrowing you have, and your industry. Generally, business credit ratings contain fewer factors than FICO ratings, and improving a firm's score is simpler than improving an individual member.
On the negative side, there are fewer legal safeguards for corporate credit. Under personal credit rules, you have the option to challenge anything on your credit report to delete any inaccurate negative entries.
There are no similar regulations governing business credit. The result is that you may have a much harder time resolving issues with your company credit report. You can raise concerns with the entity that has them listed, but they are not required to reply.
What impact does my Personal Credit have on my Business Credit?
When you register for a business loan, most lenders will pull your personal credit record, and they may relate your qualifying and loan conditions to your personal credit record. However, some lenders may place a greater emphasis on personal credit than others.
Let's take an example!
SBA loans require a personal credit rating of roughly 650. However, if you already have a solid, established corporate credit history, lenders may give less weightage to your personal credit score.
If a lender only requests your EIN or DUNS Number on an application, they are most likely only assessing your company credit. However, if you need to disclose your Social Security number throughout the application process, the lender would often pull your personal credit history.
When acquiring a company credit card or line of credit, you can use your great personal credit history to your advantage by signing a personal guarantee. As because you pledge to repay the amount if your firm can not, the lender may be more likely to give you money and provide better loan conditions.
A personal guarantee will not appear on your credit reports, and it will most likely not affect your credit unless you violate the terms and conditions of the agreement.
Luckily, for personal credit, the lender keeps your information private. Therefore, they will not check your business credit before providing you with a personal loan or credit card.
What impact does my Business Credit have on my Personal Credit?
A lender will often run a strict credit investigation into your business credit history when you apply for a personal loan. Every credit check can decrease your credit rating by a few points, so expect a minor drop in your score.
Some business credit activity can damage personal and company credit ratings, while others only affect your business rating. It all relies on what the credit provider reports.
As a result, business credit transactions can be included in the total usage rate if your lender discloses all your credit activity to the personal and commercial credit bureaus.
It implies that carrying a large balance on your business credit card can be bad for your personal credit score. The same is true for late payments and other poor credit card behavior.
As a result, your corporate credit can improve your overall credit rating. It is, however, crucial to use your business credit responsibly, and your credit card issuer needs to disclose that information to consumer credit bureaus.
How to create the perfect balance between both Credit Scores?
Many individuals believe that business credit and personal credit don't affect each other—but because your company credit may affect your credit score, it's crucial to understand how to handle your business finances to develop your business without jeopardizing your personal credit (and vice versa).
Here are some pointers to keep your credit scores as high as possible.
1. Examine your credit scores regularly
You must be aware of the necessity of monitoring your personal credit score regularly—and if you have a business credit card, you should also check your business credit score.
The more you understand about your credit standing with corporate and consumer credit agencies, the more equipped you'll be to enhance your credit if required.
2. Make good use of your credit cards
The safest way to improve your rating is to use your credit cards wisely. Failure to make payments on your company credit cards can severely affect your business and individual credit ratings.
Even something as basic as carrying a large credit card debt can impact your personal credit. So strive to pay off your company and personal expenditures regularly.
3. Before making major commercial expenditures, consider your options carefully
Some small-company owners obtain business credit cards to receive rewards on daily business spending. Other business owners utilize their business credit to pay significant business purchases or supplement low cash flow months.
While corporate credit interest is tax-deductible, carrying a large debt on your company account is not usually a good idea—and putting a substantial business purchase on plastic is not always a good idea.
Furthermore, small business credit is a better option if you want to expand your business but do not have the funds. They offer affordable deals and interest rates.
Consider all of your options before making a significant business transaction from your credit card, and be careful of the implications on your rating.
4. Don't allow your personal credit patterns to wreak havoc on your business
Many individuals are concerned about corporate credit hurting personal credit—but keep in mind that it works the opposite way. If your personal creditworthiness is poor, you may have problems acquiring business credit.
While secured company credit cards are always possible, it is preferable to improve your credit score where lenders are ready to grant you a business credit card.
Bottom Line
Improve your corporate credit score by practicing solid financial management, maintaining your personal credit score, and understanding how the numbers affect each other. If you get it correctly, your company will be in an excellent position to borrow.
If you can manage your business accounts and finances properly, you will have an easy time maintaining a good credit score. That's where Deskera comes into play.
Deskera Books is a simple online accounting, invoicing, and inventory management software. It is a one-stop solution for all your company requirements, from making invoices and managing spending to seeing your financial papers whenever you need them.
Now, let's look at some business and personal credit FAQs.
Frequently Asked Questions
1. What is the impact of applying for a corporate credit card on personal credit?
When you apply for a company credit card, you make a personal promise to repay your obligation. It offers lenders a reason to verify your personal credit before granting a company credit card to you. Lenders want proof that you'll use your company credit properly. If you don't have much credit history, they'll look to your personal credit as the primary indicator of your general credit practices.
2. How are company credit scores calculated?
A business's credit score, like personal credit, is determined by its financial history and other factors, like repayment history, balance sheets, legal filing and history, industry, and future business prospects.
3. When could My Business and Personal Credit Scores be the same?
Any company can apply to the IRS for an EIN, and most firms as a distinct legal entity must have one. If your firm does not have its EIN or TIN, your business credit score will be your personal credit score.
How Deskera Can Assist You?
As a business, you must be diligent with the employee payroll system. Deskera People allows you to conveniently manage payroll, leave, attendance, and other expenses. Generating payslips for your employees is now easy as the platform also digitizes and automates HR processes.
Key Takeaways
· Your personal credit score links to your identity via your Social Security Number (SSN).
· If your company has a distinct EIN or TIN, that number will have its credit score. This will be your Business credit score.
· Your personal credit is typically summed up into a single figure that creditors may view at a glance.
· Commercial credit agencies assess and report uniquely; companies have no comparable service.
· The most crucial elements for business credit are how you manage your payments, how much borrowing you have, and your industry.
· When you register for a business loan, most lenders will pull your personal credit record, and they may relate your qualifying and loan conditions to your personal credit record.
· Some business credit lenders may place a greater emphasis on personal credit than others.
· When acquiring a company credit card or line of credit, you can use your great personal credit history to your advantage by signing a personal guarantee.
· A lender will often run a strict credit investigation into your business credit history when you apply for a personal loan.
· Every investigation can decrease your personal credit score by a few points, so expect a minor drop in your score.
· Some business credit activity can damage personal and company credit ratings, while others solely affect your business rating. It all relies on what the credit provider reports.
· Your corporate credit can improve your personal credit score as long as you use it properly.
· Here are some pointers to keep your business and credit scores as high as possible:
o First, examine your credit scores regularly.
o Then, use your credit cards wisely.
o Finally, before making major commercial expenditures, consider your options carefully.
o Don't allow your personal credit patterns to wreak havoc on your business.
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