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Is business credit separate from personal credit?
Yes, business credit and personal credit are separate types of credit. The two are established differently, have distinct credit scoring models, and are governed by different rules.
Before we dive into the many differences between business and personal credit, we need to establish what the two credit types are:
What is business credit?
Business credit is what it sounds like—credit that’s owned by a company, not an individual consumer.
A business’s credit is linked to its Employer Identification Number (EIN) or Tax ID Number. A company’s business credit score reflects its financial history and helps lenders determine its eligibility for loans, allowing the company to borrow money.
How do you establish business credit?
You can establish a business credit score for your company by buying things on credit. The most obvious way to do this is to get a business credit card and use it regularly and responsibly. For example, score a credit card for freelancers now even if you only run a side hustle, then you should get a business credit card to establish business credit for when your contract work becomes a full-scale operation.
Additionally, many vendors and suppliers will sell you goods or provide services and let your business pay for them later, which is considered a form of credit.
There are four types of business credit you can establish:
- Vendor credit: Many vendors will sell goods to your business and will extend a line of credit that you can use to pay for them.
- Supplier credit: Similarly, if your business needs supplies, you can buy them and pay later, building credit as you do so.
- Service credit: Your company probably has to pay for internet, a phone plan, utilities, and potentially a web host. These services are almost always provided upfront and paid for with a line of credit.
- Retail credit: Just like a consumer, your company can apply for a retail credit card if there’s a particular store that you shop at all the time for your business. 1
All of these require a relationship with a supplier or retailer that’s relevant to your business. Your business credit is established when the vendor reports your payments to the business credit reporting agencies.
What is personal credit?
Personal credit reflects your personal financial history and is connected to your Social Security number.
Similar to business credit, establishing good personal credit requires demonstrating an ability to manage your finances responsibly. A good personal credit score allows you to get credit cards and loans with favorable terms (e.g., a low interest rate).
How do you establish personal credit?
There are also several ways to build personal credit, such as:
- Responsibly using a credit card: As with building business credit, the easiest way to establish your own credit history is to get a credit card, use it regularly, and always pay it off on time.
- Applying for a credit-builder loan: Some banks and credit unions offer special loans for building your credit. If you’ve never had a loan before, getting one of these is a great idea.
- Becoming an authorized user on a credit card: If you can get a trusted family member or friend to authorize you to use their credit card, many lenders will report their account history to the bureaus as if it was your own. Being an authorized user can instantly boost your score—as long as the person you choose practices good credit habits.
What is the difference between business credit and personal credit?
There are five major differences between business and personal credit:
1. Credit reports
Your personal credit report is published by the three major consumer credit bureaus:
In contrast, your business credit report is published by commercial credit reporting agencies, such as Dun & Bradstreet. (Equifax and Experian also provide commercial credit reporting, but TransUnion doesn’t.)
While lenders only report your personal credit activities to consumer credit bureaus, they may report your business credit activities to both consumer and commercial credit bureaus.
Checking your credit reports
You’re entitled to a free personal credit report from one of the credit bureaus at least once a year (available from AnnualCreditReport.com), but you usually have to pay to access your business credit reports or use a business credit monitoring service offered by a commercial reporting agency.
Business credit score services
The following are commercial reporting services that offer summaries of your business credit report:
You can also get a summary from Experian and Equifax’s business credit reporting services.
2. Credit scores
Business and personal credit scores are both created using different “scoring models.”
When it comes to business credit scores, on the other hand, there’s no standardized industry scoring model. This means that business scores can vary between different bureaus more than personal credit scores do. Business credit scores also have different scales, although many range from 1 to 100.
Common business credit scoring models include:
- PAYDEX score by Dun & BradStreet
- FICO Small Business Scoring Service (SBSS) Credit Score
- Intelliscore by Experian
- Business Credit Risk Score and Business Failure Score by Equifax
What influences personal and business credit scores?
Your personal credit score is determined by your credit history as a consumer. The factors that influence it include your:
- Payment history: This shows whether you usually pay your bills on time or habitually miss payments.
- Credit utilization rate: The amount of your credit that you’re using. Using less credit is better for your score.
- Credit mix: The variety of credit accounts that you have (e.g., credit cards, mortgages, auto loans, etc).
- Length of credit history: How long you’ve been using credit, measured with metrics like the average age of your credit accounts.
- New credit: The number of credit accounts you’ve opened or credit applications you’ve submitted recently.
Many of these factors also determine business credit scores. However, some credit bureaus also look at other metrics that measure companies’ financial health.
The factors that influence your business credit score may include:
- Financial activity (such as your business’s borrowing and spending history)
- Number of credit accounts
- Credit utilization rate
- Company size
- Length of time in business
- Legal filings
- Cash flow and profitability
3. Credit limits
Credit limits (i.e., the size of a loan, or the maximum amount you can spend on a credit card) tend to be higher for businesses than individual consumers.
For instance, business loans can be offered for millions of dollars, whereas personal loans usually max out at about $100,000 and can sometimes be as low as $100. 2
Similarly, in 2020, the average consumer credit card had a limit of $31,015. The average small business credit card limit was significantly higher, at $56,100. Large corporations often have credit cards with even higher limits. 3
4. Transfer of credit
Personal credit stays with you permanently, while business credit only stays with you as long as you own that business. In other words, if you sell your company, your business credit will be transferred to the new owner. 4
This also means that the higher your business credit score, the more valuable your business may be to potential buyers.
5. Legal protections
Businesses have fewer legal protections than consumers when it comes to credit.
For personal credit, consumer credit laws allow you to dispute mistakes on your credit report and have incorrect information removed.
Unfortunately, there are no equivalent laws when it comes to commercial credit, meaning it’ll be more difficult to challenge items on your business credit report.
You’re allowed to still dispute information with the business credit reporting agency, but they aren’t obligated to reply or respond to your complaints. In many cases, they will, but it’s not guaranteed.
Do I need business credit?
Yes, if you’re a business owner, you probably need business credit, although getting it isn’t required by law.
It’s common to have to buy things on credit when you own a business, and as we mentioned above, using your personal credit card for those transactions opens you to legal liability. It also puts you at risk of maxing out your credit card, which will hurt your personal credit score.
Transactions that require business credit
Business credit may also be required for certain transactions, like:
- Getting business insurance
- Acquiring specific goods and services for your business
- Securing financing from banks, lenders and suppliers
Even if business credit isn’t required, it can make achieving these goals easier and more lucrative. If you’re running a business or establishing a startup, it’s a good idea to have business credit.
Can personal credit affect your business credit?
Your personal and business credit aren’t completely separate. They can sometimes affect one another.
For example, if you’re a sole proprietor and you don’t have an EIN, your personal credit will reflect your business’s financial history. Also, some business credit card issuers will report your activity to the consumer credit bureaus, not just the commercial credit bureaus.
Other instances where the lines between your personal and business credit become blurred include:
- When applying for a business credit card: Some issuers require your Social Security number, which normally isn’t tied to your business credit.
- When securing financing for your company: If you don’t have a long enough business credit history when you’re applying for financing, your lender might review your personal credit history as well.
- When you lease an office space: Landlords may run a personal credit check on you when you apply to rent an office space.