In this article:
If you own a small business, you probably already know that your company could have its own credit report and score. Much like your personal credit, your business credit provides a snapshot of how well your company's financial obligations are being managed.
Although they work similarly, your business and personal credit are substantially different. Business scores can offer great value to your company, and personal scores can help with everyday life. It's important to know how your business score differs from your personal credit score and when exactly you should use it. Read on to learn how business and personal credit differs and when each should be used.
What to Know When Applying for a Business Loan
If you're planning to apply for a business loan, there are a few things you should know. First, if you don't have substantial credit history as a business, or if you've never applied for business credit in the past, there is a chance you'll have to use your personal credit to guarantee a new loan. Some lenders—like the Small Business Administration (SBA)—require a personal guarantee for loans, which means you'll want to have your personal credit in order.
In addition to your personal credit, you'll also want to monitor your business credit regularly to make sure it's in good shape. It's recommended to use business credit when applying for a business loan, as long as you have sufficient credit history as a company. Doing this can help you build your business score, and also helps protect your personal score should your company ever have a financial mishap or vice versa.
When applying for new lines of business credit, make sure to verify which score will be evaluated for the application. Consider checking both your scores on your own beforehand to get an idea of what lenders will see when considering your application. To check your personal report and scores, get a free copy of your reports and scores from Experian's consumer bureau. And to check your company's score, for a limited time you can get a free copy of your business reports from Experian's commercial bureau. Remember that personal and business reports and scores are very different, so you will need to review them separately to see how each is doing.
If you think your personal credit may be used when applying for a business loan, make sure that your personal credit report does not have an active security freeze as this could delay the application and approval process. You can easily remove a security freeze online through Experian. If you've locked your credit file with Experian, be sure that your report is unlocked too. Remember to go back and freeze or lock your credit file again once you've applied for the loan, as this won't happen automatically.
Business Credit vs. Personal Credit
Just like personal credit scores, business credit scores may be used by lenders when deciding whether to issue a loan, line of credit or other debt. They take existing records of debt management and use complex formulas to determine what risk a person or business may pose as a borrower. Though personal and business credit scores are not calculated using the same algorithms, the fundamental logic behind how the scores calculated is pretty similar.
Commercial credit bureaus collect and score the information used to populate business credit reports. There are three main bureaus that service business credit: Experian Commercial, Equifax Small Business and Dun & Bradstreet.
These bureaus collect data on millions of businesses from sources including creditors, public records, official state agencies, collection agencies, corporate financial filings and marketing databases. These reports are then used to assign a numeric score between 0 and 100, which creditors use to evaluate a company's creditworthiness.
Here is an overview of the key differences between business and personal credit reports:
- Personal and business scores have different ranges. Business scores typically range from 0 to 100. Personal scores can range from 300 to 850.
- Business credit reports are associated with Employer Identification Numbers (EINs), while personal reports use Social Security numbers (SSNs).
- Your business credit report and monitoring services are managed separately from your personal credit report and monitoring, and through separate databases and departments at Experian.
- The data used for business and personal credit reports is regulated differently.
- Unlike personal credit reports, which can be placed on a security freeze or locked, business credit reports can never be frozen.
- Business scores can be checked by anyone (they will need to purchase the report and scores), while personal scores can only be checked by yourself and by others with your permission.
When Should I Use My Business Credit?
In general, it's best to keep business credit and personal credit separate—using your company's credit score for business-related credit and vice versa. Using your business credit when appropriate will help you protect your personal credit from anything that happens at work and help your business build strong credit for the future.
There are some cases, however, when a business owner might have to use their personal credit for business-related borrowing. This could be the case if the business you own is a sole proprietorship. In these scenarios, if you don't already have an EIN, then you'll need to use your personal credit when applying for credit.
When Should I Use My Personal Credit?
Your personal credit score should be used when applying for credit that's unrelated to your business. Even if you have well-established business credit, you don't want to forget about your personal credit, as you may eventually need it for something in your everyday life.
If you don't yet have a business credit score or have never applied for credit through your company, you may find that you need to use your personal credit to obtain loans. If this is the case, make sure to communicate with the lender to confirm that it will report records of your account and payments to the business credit bureaus. Evidence of your company's account and payment history will help to jumpstart your business score, which you can later use when applying for other business-related credit.
Always Monitor Both Your Business and Personal Credit
Having good business credit can go a long way in helping your company grow. Whether you're looking for a business loan or want to start a relationship with a new vendor, a good business score can instill trust and help you negotiate and secure good credit terms.
If you own a company, it's important to maintain a separation between your business and personal credit profiles. Ideally, you want to monitor and maintain both scores so that you are prepared for credit related matters in both your work and personal life.
Since business credit reports are held by a different set of credit bureaus, it's important to be extra vigilant when checking your credit. Make sure that when you pull and monitor business credit, you're doing it with a credit bureau, like Experian, that services business accounts. Similarly, when checking your personal credit, remember it has nothing to do with your business credit report.
If you're not sure what your business score is, you can check with one of the three main credit bureaus that provide commercial scores. You can get a copy of your business credit report from Experian Commercial.