Business Credit versus Personal Credit and why they should remain separate entities
Keeping business credit separate from personal credit is necessary for any business owner and vital for any business. However, keeping those entities separate is a challenging process for small business owners, especially for sole proprietors. Industry experts strongly advise business entities to keep a clear distinction between their personal and business finances. In fact, maintaining such financial discipline becomes highly instrumental in obtaining small business loans. Business owners, also, do not want any adverse business conditions, such as high debt, affecting one’s personal credit profile.
When it comes to small businesses in particular, the business and personal credit of the owner may remain attached regardless of the efforts you make to distinct them. Before releasing small business loans, banks consider the history of the business. However, if the particular business doesn’t have sufficient history, banks may consider the owner’s credit history as a critical aspect when offering a loan.
Business credit versus personal credit
One of the easiest ways to differentiate business credit from personal credit is by determining the way it is linked to you- personal credit is established by use of one’s Social Security number while the business credit history relates to you either with an EIN (Employer Identification Number) or Tax ID.
Getting an EIN is not a difficult task. An EIN is highly recommended for all businesses- especially sole proprietors- particularly when they need to apply for small business loans from reputable banks. Personal credit history is monitored by Equifax, Experian and TransUnion, which are the top three major credit bureaus in the U.S. These institutes keep the business profile distinguished from the personal credit of a business owner when a business credit profile is established separately from the personal profile.
To gauge a personal credit profile, establishments use a single number. Creditors will utilize this number to get a good idea about your overall credit history. This strategy to measure a person’s credit risk was established by FICO and is widely used when deciding an individual’s personal credit score.
When it comes to businesses, however, there is not such a system. The overall business credit score will be determined observing aspects such as the way your business pays its bills, the amount of debt it has and the type of industry in which it is involved. In simple terms, it is easier for a business to maintain its credit score compared to the personal credit.
A major drawback of business credit maintenance and scoring is that it has less legal protections. Although it is possible for an individual to challenge the details in his/her personal credit report, such actions are cumbersome when it comes to a business credit report. In this case, dealing with business credit inaccuracies is tougher. Even though you may challenge any discrepancies in your report, the respective agencies are not legally bound to respond.
Reasons to keep personal and business credit as separate entities
One of the main reasons to keep these credit entities separate is for taxation concerns. Keeping business credit detached from personal credit helps auditors to rectify any potential errors in the financial flow of the business. Clear account reporting becomes highly contributory when the business needs to acquire small business loans. Apart from this, precise account reporting will help you to produce proper information to the IRS and to stay away from unpleasant conflicts with them. Such practice also helps small business owners to have a clear picture about the progress of the business. This good credit practice always keeps personal expenditure away from business credit activities.