Posted by Pamela Swift in Finance & Capital
Many small business owners don’t realize this, but personal credit and business credit are actually two entirely different entities. That being said, in many cases they end up getting mixed due to the fact that many small business owners do not have a clear enough distinction between their personal and business finances.
“What is Personal Credit?”
Essentially personal credit is tied to your Social Security number and is meant to track your creditworthiness based on your personal finances. As such any personal loans, credit cards, and other forms of debt will come under its purview.
Many small business owners take out personal loans to fund their businesses and raise capital, and some also tap into home equity or use personal credit cards for business expenses. As a result the delineation between the personal and business credit is often blurred.
“What is Business Credit?”
In contrast to personal credit, business credit is tied to your Employee Identification Number (EIN) or Tax ID number. Some small business owners may not even have an EIN however, as sole-proprietorships do not require it. However in the absence of one it won’t be possible to establish business credit.
Assuming business credit is established however, it will be scored based on the business debt, how it pays off bills, and any lines of credit that have been extended. Because it deals with a limited range of variables, your personal finances are less likely to affect your business credit and more often than not it works the other way around.
“What Do Small Business Loans Look At?”
Unlike big corporations, small businesses unfortunately rarely have the luxury of relying solely on their business credit. That is due to a variety of factors, but mostly it comes down to the fact that most small businesses do not have a well-established business credit.
As a result of that, more often than not lenders will look to a small business owner’s personal credit score to determine whether or not they are eligible for a loan. In some cases that can compound things further especially if the business has incurred debt in the form of personal loans which is affecting your personal credit rating.
What Needs to Be Done to Secure Small Business Loans
Based on everything you now know, it should be clear that the first thing that you should do is start to establish business credit. The first step to do so is to get an EIN – which is simple enough really. Also it would help to register with business credit bureaus such as Experian and Equifax.
After that you should look to separate your personal and business finances by getting a separate business checking account, using a business credit card, and making sure your personal finances don’t overlap. Once you do you can start to compare small business loans and see which offer the most favorable terms, as any payments to loans will help build your business credit further.