The Difference Between Business Credit and Personal Credit

A woman working from her kitchen table reads over her bank statements with her laptop and calculator nearby.

This article is for educational purposes and does not constitute legal, employment, or tax advice. For specific advice applicable to your business, please contact a professional.

As your business looks to grow, you may need money to fund the expansion.

Say you want to purchase a second food truck to serve a new area, or you need to buy a new freezer so you can add ice cream to your coffee shop’s menu — these are just a few of the business expenses that need capital to support them. According to the 2020 Small Business Credit Survey conducted by the Federal Reserve Bank, paying operating expenses (43 percent) posed the greatest business challenge for small businesses, followed by securing credit (33 percent). When a business first opens, it has no credit history, making it challenging to get loans and a credit card.

While you may be tempted to turn to your personal credit, experts recommend keeping your business and personal credit separate to limit personal liability.

What is business credit versus personal credit?

While your personal credit details your history of borrowing, opening credit cards, and payment and credit history, your business credit shows the same types of activities made on behalf of your business. Your business credit score, similar to a personal credit score, represents the creditworthiness of your business based on your business credit. Like a personal credit score, lenders use a business credit score to evaluate a business’s application for credit.

Experian says that your personal credit score can affect getting business credit if the lender checks your personal credit as part of the approval process. If this check is performed, it registers as a hard inquiry on your personal credit report. Business lenders report business credit activity to consumer credit agencies, so this negative or positive activity can affect your personal credit score.

Using business credit — such as a business credit card — helps you increase your business credit score and allows you to more easily get credit in the future. Purchases you make for the business on a personal credit card do not build business credit.

What is the difference between a business and a personal credit score?

To establish a business account and begin building your business credit, you need to use an Employer Identification Number (EIN), whereas a personal credit account works with your Social Security number. Many businesses start establishing business credit through a credit card with a lower limit and build credit by paying on time.

A personal credit score ranges from 300 to 850, with scores over 670 considered good credit scores. However, a business credit score ranges from 0 to 100, with lenders considering scores over 75 to be a low credit risk. In addition to influencing an approval or denial, the score can determine repayment terms and interest rates. If you apply for Small Business Administration (SBA) loans, your FICO® LiquidCredit® Small Business Scoring Service score will be calculated during the lending application process. This type of business credit score is between 0 and 300. As of October 2020, the SBA requires a minimum of 155 to pass the prescreening process.

Should you use personal credit for business purposes?

According to the Mercator Advisory Group, 36 percent of small businesses commingle personal funds with B2B purchases. This report found 49 percent of millennial business owners used personal credit cards for business expenses compared to 31 percent of older business owners.

Using your personal credit for business is not a great idea. Experts caution against mixing personal and business credit. Forbes says that if your business is an LLC, you could lose protection against personal liability when you mingle funds and credit cards. By using business credit solely for business purposes, it helps you increase your business credit score and allows you to more easily get credit in the future. Purchases you make for the business on a personal credit card do not build business credit.

Using a business credit card or trade credit also makes it easy for employees to make approved purchases. For example, if you don’t have a business credit card and your head chef wants to go to a farmers market for fresh local produce, you’ll need to reimburse them for the purchase (which creates extra paperwork and does not help build your credit).

Types of business credit

Businesses can apply for a wide range of business credit and loans. Here are a few of the most commonly used:

  • Term loans lend a fixed amount to the company with a fixed monthly payment and length of the loan. SBA loans fall into this category and can offer low interest rates for businesses who qualify. Certain businesses may also qualify for microloans, which are provided by nonprofit organizations and mission-based lenders and are for less than $50,000.
  • Business lines of credit allow you to borrow up to a limit, and you can borrow additional money once the balance is below the limit. You only pay interest on the amount borrowed.
  • Business credit cards are technically revolving lines of credit, but allow for more flexibility to give designated employees purchasing power. While some offer rewards, others also have an annual fee.
  • Vendor accounts, also known as trade credit, allow you to pay for goods and services within a set period of time after purchasing, typically net-30, meaning 30 days after purchase.

According to the 2020 Small Business Credit Survey 12 percent of businesses use trade credit. The ability to use trade credit is one of the biggest differences between business and personal credit. Benefits of trade credit include freeing up cash flow and financing short-term growth. For example, a food truck business may have a vendor account or trade account with its beverage supplier. The vendor allows the truck owner to purchase food on a weekly basis and could offer discounts for paying more quickly within a set time or, alternatively, set a late penalty for paying after the term.

The financial health of your business can determine its long-term success. Start your business off on the right foot by opening a separate business checking account, requesting an EIN to identify your business, and applying for a business credit card. By actively protecting and managing your business credit score, you can grow your company and continue to serve customers for many years in the future.