When you’re launching a business, your credit profile can either open doors or quietly close them.

Many entrepreneurs are surprised to learn that business credit and personal credit are not the same. This is important if you want to secure funding, safeguard your personal assets, and grow your business.

At Permissible LLC, we work with entrepreneurs to create strong financial foundations. Let’s talk about what every entrepreneur needs to know about business credit vs. personal credit and why both are important.

What Is Personal Credit?

Personal credit is a measure of your personal creditworthiness. It shows how you personally handle personal debt such as:

•             Credit cards

•             Auto loans

•             Mortgages

•             Student loans

•             Personal lines of credit

Your personal credit score is determined by credit reporting agencies such as:

•             Experian

•             Equifax

•             TransUnion

Your personal credit score is used by lenders to determine risk before approving a loan, credit card, or other financing.

Important Factors That Influence Personal Credit:

•             Payment history

•             Credit utilization

•             Credit history length

•             Credit mix

•             New inquiries

For many startups, personal credit is the biggest factor that lenders consider – at least in the beginning.

What Is Business Credit?

Business credit is connected to your business, not you. Business credit is a measure of how well your business handles its finances.

Business credit is reported by companies such as:

•             Dun & Bradstreet

•             Experian Business

•             Equifax Business

Instead of a FICO score, business credit reports may use:

•             PAYDEX score

•             Business credit risk score

•             Payment history

A good business credit report will show lenders and vendors that your business is trustworthy – regardless of your personal financial situation.

The Main Differences Entrepreneurs Need to Know

1Ownership of the Credit Report

•Your personal credit report belongs to you.

•Your business credit report belongs to your business (LLC or corporation).

If your business is set up correctly and your credit is established correctly, your business can be financially separate from you.

Liability and Risk                                                                                                                            

You are personally liable for repayment with personal credit.

With business credit:

•             The business is liable.

•             Your personal assets may be protected (depending on how your business is set up).

This is one of the greatest benefits of setting up an LLC or corporation.

Borrowing Power

How using your personal credit to finance your business affects your borrowing power:

•             Your personal credit usage will increase

•             Your personal credit score may decrease

•             Your borrowing power will be limited

How to establish business credit:

•             Your borrowing power will increase

•             Your personal credit will remain intact

•             Your business will be ready for bigger funding opportunities

How Reporting Differs

Personal credit reporting is common and accessible.

Business credit reporting:

•             Usually has to be created deliberately

•             Requires accounts with vendors that report to business credit bureaus

•             May not develop automatically

Many business owners believe that business credit will develop on its own – it won’t.

Why Lenders Check Both Anyway

Even if you’re applying for a business loan, many lenders will still check your personal credit, especially if:

•             Your business is less than 2 years old

•             Your business income is small

•             You’re applying for an unsecured business loan

•             You’re applying for an SBA-guaranteed loan

For instance, most lenders who take part in programs sponsored by the United States Small Business Administration require a personal guarantee.

As your business matures and develops solid financials, lenders will increasingly use your business credit instead of your personal credit.

When to Prioritize Building Business Credit?

Right away.

The sooner you can organize your finances and build business credit, the more you’ll be able to:

•             Qualify for larger funding amounts

•             Obtain favorable interest rates

•             Leverage favorable vendor terms

•             Safeguard your personal assets

Putting it off until you “need funding” is often too late.

How to Begin Building Business Credit

These are the essential steps all entrepreneurs should follow:

1.            Establish a legal business entity (LLC or corporation)

2.            Obtain an EIN

3.            Open a separate business bank account

4.            Establish vendor accounts that report to business credit bureaus

5.            Pay all business bills on time or ahead of schedule

6.            Regularly check your business credit reports

Consistency is the key.

Final Thoughts

Personal credit gets you started.

Business credit gets you growing.

At Permissible LLC, we work with business owners to develop strategies for structuring, compliance, and funding readiness so they can become truly fundable – without overleveraging their personal credit.

If you’re ready to build a stronger financial foundation and put your business on the path to growth, we’re here to help.

Let’s build your business the right way.