A good business credit score helps you get financing and Cash flow.
Your company’s credit score can affect a supplier’s decision to do business with you and the terms they offer. For example, a wholesaler may: Repayment Terms If you have a history of repaying your credit on time. You may also be able to secure more favorable interest rates from lenders if you have a strong business credit file.
If you don’t currently have a good business credit history, you may be tempted to use a personal credit account to secure funds in your own name. This guide explains the potential risks of doing so and the key differences between personal and business credit.
What is the difference between business credit and personal credit?
Personal credit and business credit work in the same way, with the main difference being the trusted entity. You are responsible for personal accounts opened in your name, but your company is responsible for debts acquired in the business name. Securing a business credit instead of a personal credit protects your personal assets.
Companies are also more likely to make large, expensive purchases, such as machinery, rent, and inventory. Product developmentthey tend to have higher credit limits due to marketing costs.
Personal and business credit scores
the purpose
The biggest difference between personal and business loans is how the funds are used: a business may use the funds to make its next payment. Expenses like stockmachinery, travel expenses, office supplies, legal fees, etc.
An individual can use a credit card in their own name to pay for the same, but the responsibility for the debt remains with the individual. Some of the more common uses of personal credit include paying bills and purchasing goods such as furniture, cars, and clothing.
Credit History
Your personal credit history reflects your complete financial situation. It includes your personal information (such as your name, address, and Social Security number) as well as any loans or credit accounts you have, such as a mortgage, car loan, bank overdrafts, and personal credit cards.
However, a business credit history only covers the financial situation of the business. This includes the industry classification, credit risk score, and loan history under the business name. Equipment financing agreements, business credit cards, Credit facility It will appear on your business credit report.
Hard credit checks will appear on both types of credit reports, and having too many hard credit checks can give you the impression that you have too many lending options, which can negatively impact your chances of getting credit.
Credit Scoring Model
Credit bureaus rate personal credit scores on a scale of 300-850 because there are many more factors that affect personal scores, while business credit scores are scored on a scale of 0-100, with anything above 75 being considered good. Business Credit Score.
Credit reporting agencies
Equifax, Experian, and TransUnion are the three major credit reporting agencies used by lenders for both personal and business loans, although Dun & Bradstreet focuses on business credit history.
Liability and personal guarantees
Consumers tend to have more protections when they use their personal credit cards to make purchases. Some lenders offer Credit Card Lawprovides protections for people who use personal credit, but doesn’t typically apply to business credit cards.
Like personal loans, some small business loans require a guarantor – someone who will repay the debt on your behalf if you (or your business) are unable to repay the loan.
The impact of debt
Business credit attaches to your company. If you can’t pay the loan, your business can be closed down and written off unless you have a guarantor on the loan. All you can reclaim are your business assets, such as retail stores, inventory, and property.
However, individuals have less protection against debts they cannot repay. Repayment is their personal responsibility, and if they cannot repay, the debt cannot be written off. Personal assets such as homes, cars and valuables may be at risk.
Access to credit information
It’s free to check your personal credit score through reporting agencies like Equifax and Experian, while businesses must pay to access their scores, with fees ranging from $40 to $50 per report.
A personal credit report also provides greater privacy to your personal information. Anyone can see a company’s credit score by paying an access fee – you don’t have to be a director or employee of the company.
Where personal and business credit meet
Although there are differences between personal credit and business credit, there are also similarities that both options share. First, all loans require a credit check. Lenders want to make sure that the borrower will be able to repay the money they lend, so they may run a credit check on the borrower or business before agreeing to a loan.
largely credit card Companies are also Business ExpensesWhether it’s a percentage of your spending back in points or discounts from co-branded brands, these perks can compound over time, just like the points you earn on your personal credit card.
If debts pile up, you may end up being responsible for them. Before you agree to take on any debt, find out if the funds require a guarantor. loan That is the name of your company.
How to build business credit for your startup
Building business credit is a long-term endeavor, but there are some quick wins you can take to help improve your business credit score as a startup.
- Pay your bills on time: Just one late payment can remain on your business credit file for up to six years, so pay every invoice on time, or early if possible.
- Keep your credit utilization ratio low. This shows lenders that borrowers are not overspending and using all of their available credit.
- Don’t close old accounts that are in good standing. Unused business accounts can help keep your credit utilization ratio low.
- Increase your business credit limit if possible: But don’t use the extra limit. If your limit is $2,500 and you spend $500 on your credit card, your credit utilization ratio will be lower than if your limit was $1,000.
- Maintain a mix of different business credit types. Reporting agencies take your credit mix into account when calculating your credit score. Try combining options like these: Revolving Credit Facilitymonthly installments, credit card repayments, etc.
- Regularly monitor your business credit report. If there are any details or errors in your company’s credit file that you don’t recognize, contact the credit bureau and have them look into it.
Build business credit and secure capital
Your personal credit file isn’t the best recourse when trying to secure credit for your business. Building a good credit history and score in your business name will open up more opportunities for your company, and you won’t have to take on any debt as a personal citizen (unless you need a guarantor for your business loan).
If you are looking to raise capital for your small business, Shopify Capital It helps. You have access to funds that are paid back as a percentage of your daily sales, so you don’t have to worry about forgetting to pay back your loan.
Frequently asked questions about personal and business credit
Is there a difference between personal credit and business credit?
Businesses tend to have higher credit limits than individuals, and there is also a fee for access to your credit report. However, you are personally responsible for any debts incurred through personal credit. Access to your personal credit report is free.
Will my personal credit affect my LLC?
While not all lenders will look at a personal score when evaluating whether to lend to an LLC, it is an option, especially if the business is newly registered or has a low credit score.
Is my business credit score different from my personal credit score?
Businesses have their own credit scores that are independent of personal credit scores. The scores are also calculated differently: businesses are rated on a scale of 0 to 100, while personal scores range from 300 to 850.
Can I use my personal credit card for business?
Some small business owners use their personal credit cards to purchase items for their business, but remember that even if the items purchased are for business use, you are still personally responsible for the debt.
*Shopify has partnered with Stripe Payments Company and Celtic Bank for Shopify Credit. The card products are issued by Celtic Bank under license from Visa USA Inc. Issuing bank terms and Shopify Credit Program Terms“Cash Back” means rewards earned as a percentage discount on eligible purchases. You will earn 3% Cash Back as a statement credit on eligible purchases up to $100,000 USD per year in your top monthly spend category: Marketing, Fulfillment, or Wholesale, and 1% Cash Back thereafter. You will earn 1% Cash Back in the other two spend categories. Limits apply. Rewards Program Terms For more details:
*Shopify Capital loans must be repaid in full within 18 months, with two minimum payments within the first two six-month periods.
Available in some countries. An offer to apply is not a guarantee of financing. All funds provided through Shopify Capital are issued by WebBank in the United States.
