Building business credit is a smart move. Good business credit scores can open up attractive, low-interest financing opportunities, make it easier for your business to get insurance and certain government contracts, and offer other benefits.
But what if your efforts to build business credit hurts your personal credit? Here are two potential pitfalls to watch out for.
1. Account Spillover
Sometimes what seems like a business loan turns out to be a personal loan that can be used to help fund your business. Instead of reporting account information to the business credit agencies, it will be reported to your personal credit reports and affect your personal credit scores. (You can check your business and personal credit scores for free on Nav to get a full picture of where you stand.)
Having business accounts appear on your personal credit could result in a positive impact if payments are made on time; but it could also hurt them if you miss payments or default. In addition, that debt can affect crucial ratios such as your debt-to-income ratio (often used to qualify for a home mortgage) or debt usage, which is a major factor in most credit score models.
Most major credit card issuers report business credit cards to business credit agencies such as the Small Business Financial Exchange, and only to the owner’s personal credit if there is a default. However, one major card issuer reports all business credit card activity on the owner’s personal credit reports. (You can see a quick guide to this here.)
To Protect Yourself: When filling out an application for a loan you plan to use for your business, look at the type of questions asked. If most relate to personal credit (requesting a Social Security number instead of an Employer Identification Number, for example), it may be a personal loan. You can ask the lender to clarify its policies if that is a concern for you.
2. Credit Checks
Business owners sometimes believe that when they apply for a business loan the lender won’t check their personal credit, and so they take a shotgun approach, applying for as many as possible. But some lenders will check an applicant’s personal credit scores, even for a business loan. This will create an “inquiry” on the credit report that was reviewed. Most small business credit card issuers, for example, rely on the owner’s personal credit rather than business credit when evaluating applications and almost always check personal credit reports.
An inquiry doesn’t have a major impact on credit scores. A score may drop just a few points as the result of one. However, a large number of inquiries in a short period of time could have a significant impact. Inquiries remain on credit reports for two years, though credit scores generally only take into account inquiries within the last 12 months.
To Protect Yourself: Apply for accounts you really want, and are most likely to qualify for. If you are considering a strategy like credit card or loan stacking, get guidance first so you don’t inadvertently hurt your credit.
The Bottom Line
As a business owner, sometimes you do what you have to do. That may mean tapping personal resources to pay for business purchases. The sooner you can build and use business credit, the sooner you can effectively separate your business and personal finances. That, in turn, can increase the chances that your business credit won’t hurt your personal credit.