How personal credit affects business credit and vice versa
Most accountants and financial advisors recommend that you keep your business and personal finances separate. That’s great advice, but you should also be aware that even though they are separate, your business and personal credit histories can impact each other.
Personal credit helps build business credit
Maintaining a good personal credit history can help you get financing for your company. If you’re starting a business and haven’t established a business credit history, lenders have only your personal credit history on which to base their decision to give you a loan or line of credit. If your personal credit is in good standing, you’ve already proven you are a good credit candidate.
It’s important to remember that even one or two late payments can lower your credit score, so make sure all credit obligations are paid on time. Missed payments and personal bankruptcies can have a serious impact on your credit score and could hurt your chances for obtaining credit in the future. These credit blemishes can remain on your credit report for up to 10 years and can negatively impact your ability to obtain a conventional business loan or guaranteed Small Business Association (SBA) loan, even though the derogatory history is only on your personal credit report.
Having multiple personal credit accounts in good standing can help your credit score; however, it’s wise to you limit your spending to 40 percent or less of your total available credit.
How business credit affects personal credit
There are different credit bureaus for reporting business and personal credit information, but it is possible that as an owner of a company, any business loan or line you apply for or open could be reported on both your personal credit report as well as a business credit report.
For example, when you apply for a business loan, lenders may look at your personal credit rating, called your FICO®* score, as well as any business report before deciding how much they are willing to lend. Your FICO score is based on many factors such as payment history, how long the account has been open, utilization percentage, number of inquiries, etc. So the very act of applying for or opening a business loan could affect your personal FICO score because of the inquiry on your personal credit report or the new business account being included on your personal report.
Maintaining a solid record of on-time payments for a business loan could actually raise your personal credit rating over time, if that business account is being reported on your personal credit report. On the other hand, it could hurt your personal score if payments are not made on time, or you could be considered a higher risk due to the amount of debt on your personal report.
How business credit cards affect employees’ credit
Many small business owners find it convenient to have credit cards for employees who travel frequently or make purchases on behalf of the company. Often these are company credit cards with the employee’s name; sometimes employees apply directly for a credit card which the company pays monthly. In either case, it’s important to know that when an employee’s name is on the card, it may become part of their personal credit history. On-time payments are vital to keeping your employees’ credit in good standing as well as your own.
The bottom line
When all is said and done, it’s important to maintain a good credit rating in both your personal and business lives. Since your personal credit history influences lending decisions for your business, especially when it’s in its infancy, and because your business finances can become part of your personal credit report, keeping a watchful eye on both is critical to your success.
*FICO is a trademark of Fair Isaac Corporation, an organization that computes and publishes credit scores for viewing by consumers and creditors.
Kelly Burkart is a freelance writer from Minneapolis, Minn. While she has spent most of her time writing about financial services the past 15 years, she has also explored and written about everything from cardiovascular health to travel, higher education and sustainable energy practices.