Business Credit and Personal Credit share similarities, but their differences are important for small business owners to be aware of.
Getting an understanding of some of the major differences between Business and Personal Credit can help you begin to take steps to separate the two, keeping the business finances far apart from your personal finances.
Separating personal and business credit can seem almost impossible for a small business owner. For most of us as small business owners, we are “the business”, and seeing ourselves as separate is a tall task. There are many times we may have full-on inner debates over providing for our person needs vs the needs of the business.
Regardless of it is is Business Credit or Personal Credit, Lenders and Financial Institutions must have a way to evaluate the credit worthiness of each of their applicants. They rely on other agencies to compile information about applicant and report it upon request. Business and Personal Credit is granted after Lenders get information about them from the credit bureau. Business and Personal credit agencies each have their own.
Below we will go over some of the ways Business and Personal credit are different and how those differences can affect the operation of your business.
SOME OF THE DIFFERENCES BETWEEN BUSINESS AND PERSONAL CREDIT
REPORTING AGENCIES
HOW CREIDT IS REPORTED
REQUIREMENTS FOR QUALIFICATION
CREDIT LIMITS
ACCOUNT HOLDER PROTECTIONS
Reporting Agencies
Most people are familiar with the 3 major reporting agencies for consumer credit. TransUnion, Equifax and Experian are the major reporting agencies that lender rely on for using credit to consumers.
Business Credit is reported to Equifax Business and Experian Business, but one of the major reporting agencies for Business Credit is Dun and Bradstreet. Dun and Bradstreet is a major reporter f Business credit and is critical to decision makers in commercial lending departments.
How Credit is Reported
Personal Credit is issued after checking your credit history using a number that identifies you; your Social Security Number. When you apply, the lender wants the social security number in order to get information about your history from the credit bureaus.
A business also has a number that identifies it as an individual; the Employer Identification Number (E.I.N), also call a Tax I.D. Number. This number is assigned by the IRS and will identify your business as its own entity.
Requirements for qualification
Commercial lenders and Consumer lenders have different criteria when looking to approve a loan application.
Consumers are rated on factors like type of credit mix, how much of the credit it being used and how much debt they have vs the amount of income the applicant brings in. Consumer credit is also judged based on the length of the borrower’s credit history.
Starting a consumer credit history can be difficult and building that credit history can take years. Business credit can be built in months and has is not mysterious like consumer credit. Starting Business Credit is a straightforward process, and it builds as you use it.
Credit Limits
Businesses seeking credit are granted higher limits than Consumers. On average, business creditor grant credit line limits more than 5times what a Consumer Creditor would grant. For example, if you apply for a personal credit card and get a $5,000 limit, then a business credit line limit could be as high as $25,000.
Business credit is granted at higher amounts because lender understand that businesses must spent money to function and grow. Most Successful businesses required financing to grow to where they are today. A business cannot sustain itself on cash because of the nature of operations. Seasons, changes in the market and Industry Shifts and Consumer Preferences force businesses to require some type of access to credit to sustain itself through the ups and downs of operation.
Account Holder Protection
Generally, there is no agency that presides over the protection over Small-Business lending.
Whereas consumers are protected through different laws enacted to make sure lenders are not predatory and taking advantage of consumers. The Federal Trade Commission enacted the CREDIT CARD ACCOUNTABILITY RESPONSIBILITY AND DISCLOSURE ACT OF 2009Credit Card Accountability Responsibility and Disclosure Act of 2009 (ftc.gov) . Consumer laws like these have put some protects in place for consumers. These laws prevent lenders from doing things like raise your APR with out warning and negatively affect a consumer.
Sorting It All Out
It’s tempting to grab a personal loan or use a person credit card to finance your business, but it’s a mistake. It’s feels easier to get personal credit and get started. Business Credit is not hard to obtain. It just has specific steps that you must take in order to get the approvals our business needs.
There are many similarities to business and personal credit, but there are also some very important differences that can make or break a business owners chances to succeed if they don’t choose to use business credit.
Personal credit is limited and once it is used, the consumer credit bureaus will lower your score because their algorithms will conclude you are having financial difficulties because of the high usage. Consumer creditors begin to penalize you after you have used more than 30% of your available credit. A Business Creditor will reward you with additional credit when you use what they give you and pay it on time.
If you want to learn more about how to Start and Build Business Credit, we can help. We have several articles that explain the process of obtaining business credit.