The divorce between an organization and personal credit may be difficult for little organizations, especially after running the business. Generally, experts recommend having an obvious distinction between your individual and business finances so far as that’s possible. Building business credit besides your credit is part of that equation.
Somewhat, your business and personal credit may remain linked, regardless of how hard you work to help keep them separate. As an example, if you’re applying for financing and don’t have a good enough business history to qualify, you may want to include your guarantee in the mix.
Business Credit vs. Personal Credit
Your credit is connected for you by your Social Security number. Your organization credit history is connected to you by your Employer Identification Number (EIN) or Tax ID Number. That is how the federal government acknowledges your company for tax purposes. You can use it for an EIN online and receive it nearly instantly. Technically, if you’re the main proprietor, you do not require an EIN for taxes, but to establish company credit, you will.
Personal vs. Business Credit Scores
Your credit is often summarized into a single number that helps creditors see the status at a glance. FICO is the absolute most commonly used method of scoring personal credit. There’s no equivalent for businesses; each commercial credit bureau scores and reports its way.
The main factors for scoring businesses are how you pay your bills, how much debt you carry, and which kind of industry you are in. Typically, company credit ratings have fewer variables than FICO ratings, and it’s easier to improve the score for a company than it’s for an individual.
On the drawback, you can find fewer legitimate defenses for company credit. Client credit regulations enable one to solve such a thing in your report and have incorrect negative entries removed. There are no such laws regarding commercial credit, which means if there are problems with your business credit report, you might have a much tougher time getting those dealt with. You can challenge discrepancies with the agency that’s them listed, but they don’t have to respond.
Why Do I Need Business Credit?
Often, you won’t be able to complete business transactions if your business doesn’t have credit. Lenders will work with a business’s credit history when determining whether or not to loan the company money. You can also need credit to be able to get business insurance. In lots of instances, you won’t be able to buy goods and services for your business without the use of credit.
Why can’t you employ your credit for several of that? In some instances, you can, but you truly shouldn’t. The IRS has strict rules about mixing personal and business expenses. Using personal checks or even a personal credit card makes your bookkeeping much tougher. Many people also believe your business looks far more professional once you pay for business expenses with dedicated business funds.
Perhaps most importantly, if you utilize personal credit to run your business, you put yourself and your family in danger if your business fails or experiences money trouble. Creditors will then come after YOU, as you will be personally liable for the expenses incurred by the business.
When Personal and Business Credit Mix
Solutions your individual and business credit will affect each other, particularly if you’re a sole proprietor. In most cases, your credit will impact your business a lot more than the other way around.
Some business credit card applications will need your Social Security number. A landlord might want to run your credit check before leasing your space. A small business loan may need your guarantee.