When you apply for financing or services, it’s common for companies to check the condition of your credit before approving your application. This not-so-well-kept secret is true both for businesses and individuals.
Your credit reports and credit scores give lenders and service providers a way to measure risk. Good credit means that you or your business represent a lower risk to lenders and, as such, are more likely to be a sound investment.
Business accounts can potentially impact your personal credit scores, and not always in a good way.
While building good credit for your business is important, as a small business owner it’s in your best interest to keep your business and personal credit separate whenever possible. Business accounts can potentially impact your personal credit scores, and not always in a good way. And, your accountant will likely give you an earful if he or she learns that you’re comingling your business and personal finances.
Business Credit vs. Personal Credit
There are many similarities between the way business credit and personal credit work. For example, there are three major consumer credit bureaus and three major business credit bureaus that collect data and compile credit reports on you and your company.
|Personal Credit Bureaus||Business Credit Bureaus|
|TransUnion||Dun & Bradstreet|
Although Experian and Equifax are featured on both lists, personal and business credit reports at these two reporting agencies are kept separate.
When Business and Personal Credit Collide
Many business lenders, such as those who issue Small Business Administration (SBA) loans, may review your business credit and your personal credit before deciding whether or not to approve an application for business financing. In fact, FICO makes a credit score (FICO SBSS) designed to weigh factors from both your personal and business credit reports together.
If your personal credit is accessed as part of a business financing application, a record of that access, known as an inquiry, will show up on your personal credit report. Inquiries that occur as part of a loan or credit card application might impact your personal credit scores in a negative way.
Additionally, many business lenders will want you to sign something known as a personal guarantee (informally, a “PG”) whenever you apply for a new business loan or credit card. A personal guarantee says that you agree to be held liable for your business debt in the event that your company doesn’t pay back the lender as agreed. In other words, a personal guarantee makes you a co-obligor with your business.
Business Accounts on Personal Credit Reports
Just because you sign a personal guarantee doesn’t automatically mean that a business loan or credit card will show up on your personal credit reports. On the other hand, it might. It all comes down to the lender or card issuer’s policy. If you did, in fact, sign a PG, there is nothing wrong or illegal about the lender reporting the performance of the account to your personal credit reports. It is, in fact, a personally guaranteed debt.
Nonetheless, most small-business credit cards won’t show up on your personal credit reports, unless your business falls behind on payments. And if you fall behind on your payments, the negative credit reporting of business debts will have the same negative impact on your personal credit scores.
How a Business Credit Card Impacts Personal Credit
When a past-due business credit card shows up on your personal credit, it’s not a good look. To repeat, any late payments, past due amounts or other negative activity associated with the account could damage your credit scores just like any other account that appears on your personal credit reports. Your credit reports are not protected from commercial debts just because they’re commercial debts.
Even a well-managed business credit card account on your personal credit reports might not be a good thing. Remember, heavy utilization on credit card accounts has a huge influence over your FICO and VantageScore credit scores. Even if your business is paying a credit card on time, a high utilization rate on the account could have a negative impact on your personal credit scores.