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Difference Between Your Personal Credit Score and Your Business Credit

Keep your credit reports separate

By Catherine

Whenever think tanks or scientists study entrepreneurs, there is an effort to find out what makes them tick. How are they different from people who work regular jobs their whole lives. Most surveys show there isn’t always differences to be seen, but one thing is glaringly certain. Entrepreneurs aren’t good at coming up with reasons why they might fail in business.

Whether you call it positive thinking or delusional, it probably helps to have a little both traits and tendencies when going into business for yourself. Reality will set in soon enough.

Financing your business

Unless you inherit a whole lot of money, you’re going to have to find a way to finance this dream. Take special care when you are looking to obtain and manage your credit, for this is the one area that must be handled properly. Know the difference between your personal credit score and your business credit. Confusing the two can have a terrible effect on you as you get started beginning a business.

Examples of business financing

If you run a small company that provides computer equipment and services to other small businesses. You might use a business credit card to pay for your business expenses and when customers pay you, you pay off the credit card in full to avoid interest charges. The card can conveniently act as an interest-free loan during those times when cash is not readily available.

But what if something goes wrong and a project gets canceled? Imagine you put $80,000 in equipment and related expenses on your card and the client cancels the gig and won’t pay. It might be a lesson learned, but what happens to your credit? If you aren’t able to pay off the card in full from reserve funds, you might be surprised to discover that you are personally responsible for the debt. What began as a business credit problem can quickly become a personal credit problem that will affect you seriously if not solved.

Personal and professional credit scores

If you are running your own business, you probably have already discovered there is a fine line between personal and professional issues. Credit is no different. Any unforeseen event, like a returned order or delinquent payment, can have a ripple effect and cause problems for both your business and personal credit relationships. It will also lead to a lower business credit score.

If you own the business alone and there are less than 20 employees, banks and other potential lenders will view your personal and business credit scores as near the same. Therefore, protecting both is of utmost importance, even if you don’t plan on applying for a loan anytime soon.

If you have a low credit score, potential lenders will view you as a credit risk. They will limit the amount of credit you get, which will result in higher interest rates or get you denied credit completely. Always stay on top of your credit standing just like it’s any other business or personal asset.

Steps to effectively manage your credit

1. Get a business credit card as soon as you begin your business.You want to be able to establish credit and this will make you a very attractive candidate when you apply for a business loan. Don’t go overboard. Only get one card to start with and don’t use it for cash advances. The interest is too high. Pay off the bill each month to avoid more finance charges as well. 
2. Monitor both your personal credit and business credit.
3. Sign up for a credit-monitoring service to stay on top of your credit. If this is outside your budget right now, then monitor your credit on a regular basis yourself. You need to be aware immediately if someone is using your credit fraudulently.
4. Always open your bills as soon as you receive them. Look the statements over and make sure you don’t see any irregularities. Follow your accounts even more regularly online.
5. Keep on top of your personal finances. Lenders will scrutinize your personal information, especially if you are the only owner. Don't ever ignore your mortgage or personal credit card payments because you are dealing with business issues.
6. Don’t give a personal guarantee for any loan. You don’t want these types of loans or lines of credit. A personal guarantee is an investment in your business, so don't expect to see return on that investment right away. Be ready to invest a significant amount of cash.
7. Don't ever mortgage your house to start your business or keep it going. If something should happen to your business, you don’t want to face losing that and your house at the same time.
8. Sell assets if you must to make loan payments and get out of debt.
   There is an old saying: business assets are always more valuable when you don't need to sell them. However, if you are in debt and it’s the only way out, sell those assets. It's still your best choice.

Understand the difference between your personal credit score and your business credit so that you can reap the benefits of both.

3/30/2009

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