Your Personal Credit Score’s Impact on Your Business
For business people, who are uninitiated in the ways of personal credit as it affects your business, this is blog is for you. It will discuss personal credit as it relates to sole proprietorships, LLCs, and corporations. It will also discuss your personal credit score’s impact on your business. This includes to what extent, as well as what makes up a good credit score.
We want to begin with the type of business you’ve chosen for your operations, and how each business type affects an owner’s personal credit or not.
A sole proprietorship is not considered a legal business at the state level, and therefore is not registered with the state as a legal business. Business credit is not used for a sole proprietorship, only personal credit, which becomes your business credit.
Creditors don’t view your business expenses apart from your personal expenses. So, if your personal credit score is below average, lenders will not be so keen to hand out business loans. If they do, they will charge a higher interest rate than if your credit were in better shape. They may also raise your credit limit or open new lines of credit for you.
Even though you can submit an application for a business credit card or a business loan, they will not be opened under your business’s name, only under your own name. This puts the onus on you to pay your debts. To put a fine point on it, your business is not liable for debt burdens, you personally are.
Your personal credit score, which is also your business credit score,will be affected by any late or skipped payments. If you suffer from bad credit, lenders will be loathe to give you any new loans. Or if you’re fortunate enough to be approved for a new loan, it will come with higher interest rates. You can look to your poor credit score and payment history as the reason lenders turn you away for new or more credit.
A limited liability corporation (LLC) is not as affected by your personal credit. LLCs are legally known as “pass through entities”. In this instance business finances are reported separately from your personal finances on your income tax. Don’t use your social security number, used for sole proprietorships. Instead, your LLC can file under a business tax ID, the Employer Identification Number (EIN), using Schedule C.
Using an EIN your business becomes a separate entity and creditors will be examining your business tax return, and sometimes your income statement to base their decision on whether to grant you credit.
In this case, it is key to separate your business finances and not lump them in with your personal finances.
Corporations like LLCs use an EIN to file taxes and can own personal bank accounts and credit cards. But when you submit an application for new credit or loans the lender can consider your personal credit as part of doing an assessment of the business and its solvency or lack thereof.
Business Credit Score vs. Personal Credit Score
To get down to it, let’s find out what makes a good business credit score, because it operates differently from a personal credit score.
A business credit score departs from a personal credit score in that the business credit score is not standardized like the FICO rating system that rates credit from 300–850
Instead, the rating scales for credit scores vary according to the particular business credit bureau. Experian’s business credit rating Intelliscore Plus ranks credit scores 1–100. Equifax’s Small Business Credit Risk Score for Financial Services’ system ranks business credit scores 101–992.
Ensure your business credit score is acceptable to vendors, manufacturers, as well as lenders. To do so, get them acquainted with the business credit bureaus serving them. Learn more about business credit scores and how some business credit bureaus rank credit.
Three Rules to Follow for Good Business Credit
Some basic principles apply to achieving and maintaining good business credit.
- The simplest and most important rule to follow in getting a good credit score to pay on time, with no excuses for late or skipped payments. If you don’t, your credit will be damaged before you know it.
- Use your credit wisely. Take on as much as you can reasonably manage because lenders will look upon your company as a good credit risk. But don’t be foolish and get in over your head.
- Trade credit provided by vendors, suppliers, and manufacturers is extremely important. Making payments on time will grease the wheels for a rewarding relationship whenever you need their goods, products, and services. And will help to keep your credit score strong and healthy.