Many small business owners rely on using their personal credit to run their business. While this appears to be the convenient route, establishing business credit is important. In some cases, your personal and business credit are linked but, that doesn’t mean it’s a good idea to treat them interchangeably and equally.
The major risk involve using your personal credit for business purposes exposes your personal liability. If your company suffers a loss, is sued, or fails, you will be bearing the burden. Therefore, creating separation from your business and personal expenses is a smart idea.
Here are a few distinctions of personal and business credit.
Social Security Number Vs. Employer Identification Number (EIN)
Your personal credit is tied to your Social Security number. It is issued by the government so you can pay into the Social Security system and taxes. When applying for a mortgage, auto loan, or credit card, you will have to provide your social security number on the application. This will allow lenders to qualify you based on your credit history and worthiness.
Your business credit is connected to your Employer Identification Number (EIN)- it is the business equivalent of a Social Security number. This unique nine digit number is issued by the Internal Revenue Service to identify businesses operating in the United States. You can apply for an EIN through the IRS website for free. Once established, this number is used to create your file with business credit agencies.
Business Credit File Vs. Personal Credit File
When it comes to business credit, you can create more than one. If you own several businesses, you can create a credit file for each company by using separate EIN’s. Your credit capacity will be different for each one. Therefore, you will not have to compromise one for the growth of the other.
As a consumer, you only have one personal credit file and it stays with you forever. If you face any default on mortgages or have any judgments or liens against you, it will appear on your personal credit. These blemishes will negatively impact your personal credit score and could take time to repair.
Differences Between Business and Personal Credit
- When using personal credit for business purposes, the debt will appear under your consumer’s credit profile thus, affecting your overall personal credit score. If you are over-leveraged, this could prevent you from getting qualified as your score could be jeopardized.
- With business credit, all business debt will be hidden under the EIN so even if you maxed out business credit cards let’s say, it won’t have any adverse impact on your personal score. Business score is based on how well you maintain your payment on time.
- Improving your business credit history, allows you to have better chances of qualifying for business loans with low rates.
- When applying for business products such as loans, equipments, or credit cards, lenders will often check your business credit history to loan money. Often times, these amounts are higher than if you were trying to get a loan as a consumer.
- When making purchases with your business accounts – credit, checks, or debt cards, you are able to easily track those expenses. You won’t have to keep any receipts as everything is recorded on your bank or credit cards statements. This is helpful especially during tax season.
In the end, the only similarity between personal and business credit is that they allow you to get financing. Building and maintaining a robust credit profile enables you and your business to the very best offers out there.