One question we get asked quite often at Nav is “What does separating business credit from personal credit mean?” Loan brokers or “Financial Consultants” like to tell business owners to “separate business credit from personal credit.” When business owners get confused, some of them will take the chance to sell them expensive products in the form of consulting fees or credit building/repair services to “educate them and help build up their business credit.” That is horrifying. This article aims to demystify this popular mysterious statement from business financing pundits: “You shall separate business credit from personal credit to get better financing terms and protect your personal credit.”
In essence, this statement just means that (A) building up your business credit profile is important to get more favorable payment terms and obtain financing, and (B) minimizing the impact on your personal credit from business activities is important as you are likely to have a lot more credit needs as a business owner. Retaining as much borrowing capacity on the personal credit as possible can only be beneficial.
Building Up Your Business Credit
Building up your business credit means obtaining credit not by using your personal identity, but by using your business identity. You would want to get an EIN and a DUNS number to get your business credit profile established first. Then you will establish your business credit profile by opening credit accounts at places like home depot, staples, UPS, etc. You shall also get a business credit card. You will then use the credit and make payments on time. For the famous PAYDEX score, you need to open 4 credit accounts for them to start reporting your credit score. You can establish a high business credit score with impeccable payment records in about 6 months vs. years for personal credit.
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Once you get that shiny high PAYDEX score of 85, you can usually obtain better payment terms such as net 30 or net 60 instead of cash on delivery. You can also actually get a business loan that’s underwritten based on your business financials and business credit profile in addition to your personal credit profile.
Finally, I have a secret to tell you. I asked my friends at LendingClub how a business owner can get a 5.9% business loan from them. I have great personal credit scores (750+) and my supposed business history and financials are great. Why am I still priced at 12.9%? They hesitated but told me that a well-established business credit profile in a low-risk industry might get me a single digit rate given my strong business financial and personal credit. I guess enough is said about why this business credit thing is important. But anyhow, read this article about Why Business Credit Scores Matter for Your Businesses. It shouldn’t cost anything to build up your business credit profile.
Minimizing Impact on Your Personal Credit
As a small business owner, if you have ever tried to get a business loan or a line of credit, 99% of the time, lenders will ask for a personal guarantee. So how do you even separate business from personal credit? Well, here is what happens. When you apply for business credit, there will be inquiries on your personal credit. But once the business credit accounts are open, usually you don’t see the business accounts on the personal credit reports unless you are late on payments.
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What this implies is that if you have high credit utilization on your business credit accounts, as long as you pay on time, it won’t affect your personal credit scores. This is especially important for people who have excellent credit scores (FICO 720+). When you start a business, you might be tempted to get a couple of 0% balance transfer credit cards. It’s totally fine. But if I were you, I would try to get a couple 0% business credit cards and use them first before I apply/use the personal cards. This will minimize the outstanding balance and credit utilization on your personal credit reports, which accounts for 30% of the score calculation and will prevent your personal FICO scores from falling as you are using the credit to grow your business.