When starting your own business, funding can be a big hurdle—in more ways than one. And if you’re not careful, the lines between business credit and personal credit can get blurry.
As you start setting up your business accounts, make sure you understand your business financing options and how they may affect you personally. Here’s what you need to know about the relationship between your business books and your personal credit score.
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A Personal Guarantee: When Business Accounts Affect Personal Credit
Depending on what type of business you have and how you acquire credit, a business loan or credit card may affect your personal credit score. Specifically, if you personally guarantee a business account in any capacity, it can impact your personal credit.
In many cases, small business loans are guaranteed by an individual. That means you, as the sole proprietor or partner in the company, agreed to pay the debt. In such a case, the lender can seek to collect payments from you personally in the event your business can’t pay as agreed. This also positions you as a cosigner of sorts, which means the debt can be reported on your personal credit report.
Similarly, if you personally guaranteed a business line of credit, it can impact your credit history. Personal loans—including home equity loans—used to fund your businesses will affect your personal credit score as well.
Business Credit Cards
A business credit card is a great way to manage cash flow and increase your working capital. Whether or not information related to a business credit card account shows up on your personal credit report depends on how the account is set up. If you are an employee of a corporation and the company provides you with a business credit card to cover work expenses, it’s unlikely this card will be listed on your personal report. You’re simply an authorized business user for the card.
>> See our recommendations: best business credit cards.
However, as a small business owner with your own business credit card, you are considered more than an authorized user. You may be guaranteeing the account personally, which means it’s likely to show up on your report and impact your score. Before signing up for a business credit card, make sure you understand whether or not you are personally guaranteeing that account.
If you use a personal credit card for business expenses, those payments will also appear on your report and affect your score.
How to Keep Business Debt Off Personal Credit Reports
Now’s the time to think strategically about the best ways to keep your business credit score and personal credit history separate. Consider some of the options below.
Choose the Proper Business Structure
“As a sole proprietor, your business and personal credit will be one and the same,” says attorney Garrett Sutton, author of Own Your Own Corporation and founder of CorporateDirect.com. Choosing a company structure (such as an LLC, S Corp. or C Corp.) that separates business and personal finances may offer some benefits. Small business owners should talk to a business organization lawyer or CPA to find out what might work best for their situation.
Choose the Right Business Credit Card
You may be able to choose a business credit card that doesn’t routinely report activity to the consumer credit reporting agencies. However, you must make all payments on time to keep this so. Virtually all major small business cards will report if you default on the card.
Talk to Your Lender
Ask lenders whether they will check your personal credit reports for a business loan or payment plan. Those inquiries are hard pulls that affect your scores. Before committing to any financing offers, you should also ask about the lender’s policy for reporting loans. Review all contracts to determine whether or not they are requesting a personal guarantee. If you sign anything with your own name, rather than the name of your business, you may be held personally liable for the terms of that contract.
Before you tap your home equity line or personal credit cards to launch your venture, talk with a tax or financial adviser about alternatives. Loans against your 401(k) or other retirement plans, for example, don’t show up on consumer credit reports.
How Personal Debt Impacts Business Loans
Personal debt or a poor personal credit score could derail your prospects for a business loan depending on factors such as whether your business has its own score and what type of company organization you chose. Some lenders may only look at your business credit score or history, which is reported by three major business credit bureaus: Experian, Equifax, and Dun & Bradstreet. In other cases, such as with some working capital loans, the lender is more concerned with the historical fitness of your revenue streams and balance sheets than any credit score.
>> Learn more: The Ultimate Guide to Improving Your Business Credit Score
A loan you take out for business purposes could be based partly on your personal credit. If you are taking out a personal loan, such as a home equity line of credit, to help cover business expenses, your personal credit definitely matters. Even if you’re applying for an actual business loan, you may need to rely on your personal credit history if your company is new and doesn’t have its own history or successful revenue to trade on.
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