Understanding Business Credit vs. Personal Credit
For entrepreneurs starting out, there may not be a noticeable difference between their personal credit and their business credit. You may even be tempted to use your personal credit to finance your ventures in the beginning, and for many small businesses, this is a necessary evil. However, it is important when starting a business to separate your personal finances from your corporate finances as soon as possible.
One of the reasons you need to establish credit as a business is that you are likely to face far more credit inquiries than you would as an individual. This can have a detrimental impact on your personal finances, as each inquiry will chip away at your personal credit-worthiness.
Furthermore, credit scoring is different for a business than it is for an individual. Individual credit scores range from 300 at the low end to 850 at the highest and take into account nearly a hundred factors to come up with that number. Managing and improving your personal credit can be a complicated and time-consuming process. Business credit scores, on the other hand, are surprisingly simple, ranging from 0 to 100. Anything above 75 is considered “Good” but, as with personal credit ratings, higher is always better.
Building a reputation for creditworthiness as a business is important when you are seeking financing to expand or need assistance with unexpected expenses. It can be risky to use personal assets as collateral or to jeopardize your personal credit with a loan. Having good credit can increase the perceived value of your business for potential investors or buyers.
One of the most important differences, though, is that a small business can qualify for different kinds of loans than an individual could. Whether you need a bridge loan to get you through lean times, or need invoice factoring to help you grow, there are multiple options for small business loans that simply aren’t available to you as an individual. This is an important distinction if you are trying to finance growth or just need working capital to get off the ground. Your business credit will also give you a much greater credit capacity than you would qualify for personally.
Finally, if the business fails, it won’t impact your personal finances if you’ve separated them. Conversely, if you have troubles with your personal finances, you don’t want those to impact the ability of your small business to continue to produce products or services.
Start working now on building a solid foundation of business credit history for your company. The benefits you can appreciate in the long term from doing so are worth the little bit of extra effort in the short term.