As a business owner, you probably separate your business finances from your personal finances. But when you’re applying for a business loan or business credit card, the lender might want to measure how you’ve handled finances in both areas.
To do this, the lender may pull both your business and personal credit during the application process. Knowing how personal credit affects business credit—and vice versa—can help you to keep your finances healthy and qualify for business loans and credit cards.
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How is business credit different from personal credit?
Both types of credit refer to the ability to borrow money. Your personal credit is usually tied to your Social Security number, while business credit is tracked through your employer identification number (EIN).
For sole proprietors and unincorporated partnerships, your personal credit is the same as your business credit. You and the business are the same in the eyes of the IRS and credit agencies.
Business owners with other business entity structures—including single member LLCs, incorporated partnerships, S-corps, and C-corps—are separated from their business identities. These owners can build a business credit history.
Here’s a quick overview of how both types of credit work:
- Personal credit: Lenders report account activity to personal credit bureaus Experian, TransUnion, and Equifax. These agencies take that information and create credit reports. Then, credit-scoring companies use credit reports to calculate your credit scores. These scores typically range from 300 to 850.
- Business credit: Experian, Equifax, and Dun & Bradstreet are the three main business-reporting agencies. They collect information from creditors and vendors that work with you and calculate your business credit scores, which range from 1 to 100.
With both personal and business credit, a higher credit score can generally help you qualify for credit and receive good loan terms.
How does my personal credit affect my business credit…
Most lenders pull your personal credit history when you apply for a business loan, and they may tie your qualification and loan terms at least partly to your personal credit history. Some lenders may put more weight on personal credit than others.
SBA loans, for example, usually require a personal credit score of around 650 to qualify. But if you already have a positive, established business credit history, lenders may put less weight on a lower personal credit score.
If the lender asks only for your EIN or your D‑U‑N‑S Number on an application, they’re likely only checking your business credit. But if you have to provide a Social Security number during the application process, the lender will likely pull your personal credit.
You can use a strong personal credit history to your advantage by signing a personal guarantee when opening a business credit card or line of credit. The lender may be more willing to lend you money and provide better loan terms because you personally agree to repay the balance if your business is unable to. A personal guarantee won’t appear on your personal credit reports—so it likely won’t impact your credit, unless you break the terms of the agreement.
Here’s some good news: When you apply for personal credit, the lender keeps it personal. They won’t pull your business credit before offering you a personal loan or credit card.
…and vice versa?
Your business accounts may influence your personal credit in some cases. But this only happens if the lender reports your business account activity to the personal credit bureaus. So before applying, contact the financial institution and ask about their credit reporting practices.
Here are some common scenarios:
- Hard inquiries: If a lender pulls your personal credit when you apply for a business credit card or business loan, a hard inquiry may be added to your personal credit reports. These can lower your personal credit scores temporarily, but usually only by a few points.
- Late payments: Your lender may report negative information on your business accounts, such as late payments, to the personal credit bureaus. This could lower your personal credit scores, too.
- Account balances: The amount of credit you’re using compared to what you have available is called your credit utilization ratio. If your lenders report your business account balances to the personal credit bureaus, then it will influence your credit utilization ratio and potentially ding your credit.
How bankruptcies impact credit
The lines between business and personal finances are further blurred when it comes to filing for bankruptcy.
Sole proprietors can file Chapter 7 bankruptcy to erase personal and business debt, or they can file Chapter 13 bankruptcy to reorganize their debts. These bankruptcy filings will have a significant negative impact on the business owner’s personal credit for seven to 10 years, which may in turn impact their ability to qualify for business financing. The business owner may also be required to shut down their business temporarily.
Corporations and LLCs usually file for Chapter 11 bankruptcy when they need to discharge business debts (though they can also file Chapter 7). Because these business structures are treated as separate legal entities from the owners, the business bankruptcy and the business debts shouldn’t be listed on the owners’ personal credit reports. However, business owners of LLCs and corporations may still be liable for business debts if they provided a personal guarantee for them.
If you choose to keep your business open after filing for bankruptcy, your business credit may be impacted. The bankruptcy may appear as a derogatory mark on your Dun & Bradstreet business credit report, and it may factor into your Experian Intelliscore Plus. This may impact your future ability to qualify for business financing or cause you to receive less favorable loan terms.
It’s a lot to keep track of, so we’ve created this table to help sort out the details:
|Business entity type||File Chapter 13 bankruptcy?||File Chapter 7 bankruptcy?||File Chapter 11 bankruptcy?||What happens to the business?||What happens to the owner’s personal credit?||What happens to the company’s business credit?|
|Sole proprietor||Yes, to reorganize personal debt.||Yes, to erase eligible personal debt.||Yes, to restructure the business’s finances.||Business debts are erased or reorganized and the owner may lose their business assets.||It may be negatively impacted for up to 10 years.||It may be negatively impacted.|
|Single-member LLC or corporation (the owner)||Yes, to reorganize personal debt.||Yes, to erase eligible personal debt.||No.||The bankruptcy trustee may liquidate the business to pay creditors.||It may be negatively impacted for up to 10 years.||It may be negatively impacted.|
|Multi-member LLC or corporation (the owners)||Yes, to reorganize personal debt.||Yes, to erase eligible personal debt.||No.||Personal bankruptcy won’t erase the owner’s business debts, but it may remove personal liability for them.||It may be negatively impacted for up to 10 years.||It may be negatively impacted.|
|Multi-member LLC or corporation (the business itself)||No.||Yes, to erase eligible debt.||Yes, to erase eligible debt.||After filing Chapter 7, the business will shut down.||A personal guarantee could make the owner liable for the business debt, which may affect the owner’s credit.||Depends on the type of bankruptcy filed. After Chapter 7, the business will not exist.|
Keep in mind: Bankruptcy is incredibly complex, and business owners need to consider how it will affect their personal debts and business assets. Our coverage above is a simplified summary of some key topics around bankruptcy and not legal advice or guidance. Your best bet is meeting with a bankruptcy attorney if you’re considering this route. They’ll know which type of bankruptcy you can file, what’s best for your situation, and all the fine print stuff.
How to balance business credit and personal credit
Your personal credit might impact your ability to take out business loans—and vice versa—so make it a goal to build good personal and business credit.
Before applying for a business loan or credit card, ask the lender if it plans to check your personal credit and whether it reports account information to the personal credit bureaus. Then, take steps to keep both types of credit healthy:
Build good personal credit
- Pull your personal credit reports. Credit scores are based on the information in your credit reports, so making sure they’re accurate is one way to help your credit stay healthy. You can get a free copy of your Experian, TransUnion, and Equifax credit reports once a year at AnnualCreditReport.com. Scan your reports and make sure your business lender is reporting correct information. You can dispute inaccuracies with the credit bureaus.
- Make on-time payments. Most personal credit scores rely heavily on this factor. To help you stick to this goal, set a reminder a few days before your loan or credit card payment is due. If you can’t make the payment, contact the lender or card issuer for guidance.
- Keep your credit utilization low. Credit utilization is the percentage of your credit limit that you’re using. Some financial experts recommend keeping your credit card balance below 30% of your credit limit. A lower utilization can help you boost your personal credit score.
- Don’t apply for new credit. Applying for credit can cause a small, temporary drop in your credit scores, and submitting multiple applications can cause significant damage. If you need to apply for a credit card or loan, try to space out your applications by several months.
- Keep your credit cards open. A longer credit history gives lenders a better idea of how you’ve managed debt in the past. Keeping credit card accounts open can help you maintain that credit history.
Build business credit, too
- Establish your business. If your business is set up as an unincorporated partnership or a sole proprietor, then incorporating will help you start building business credit. Also consider applying for an employer identification number, opening a business bank account, and getting a D-U-N-S Number.
- Review your business credit reports. A quarter of business credit reports contain errors or are missing key information, according to a study published in the Wall Street Journal. Regularly checking your business credit reports can help you find and fix any inaccuracies.
- Open a line of credit with vendors and suppliers. When you open a tradeline, the information appears in your business credit file and impacts your credit score—as long as your vendors report your payments to business credit agencies. To build good business credit, get into the habit of using your credit for purchases and then paying on time. Better yet, pay early. One business credit agency, Dun & Bradstreet, only assigns perfect scores to those who pay before the deadline.
- Open a business credit card or business line of credit. Another option is opening a business credit account. As you make on-time payments and gradually zero out your balance, you’ll build healthy credit.
You’ll also build good business credit by only applying for credit you need. Opening dozens of business credit cards, for instance, may raise a red flag to future lenders. Along the same lines, don’t use up all your credit at once. Just like personal credit, business credit scores measure how much debt you have relative to available credit. A higher debt-to-credit ratio can translate to a lower score, so try to keep this ratio between 1% and 10%.