Business vs. Personal Credit: Everything You Need to Know

Most of us are aware that we have a personal credit score based on our history with borrowing and repaying money. What you may not know is that many businesses have their own credit scores too, and that can affect their ability to get financing. 

If you’re a business owner, it’s important to understand the difference between personal and business credit scores. Things like why they matter, how they influence each other, how you can improve them, and anything else you need to do.

Are My Business Credit Score and My Personal Credit Score Different?

In most cases, yes. You have a personal credit score that’s tied to your identity, primarily through your Social Security Number (SSN). If your business has a separate “Employer Identification Number” (EIN) or “Tax Identification Number” (TIN), then your business will have its own credit score associated with that number. 

It’s important to note that your personal credit score is still important for your business—it’s very likely to be taken into account when you apply for business loans, especially if you don’t have much business history. We’ll explain more below.

When Might My Business Credit Score and Personal Credit Score be the Same?

Any business can apply for an EIN with the IRS, and most businesses formed as separate legal entities (S Corps, C Corps, Multi-member LLCs)  are required to have an EIN. You must also have an EIN if you employ anyone. If you do not have a separate EIN or TIN for your business, then your business credit score is identical to your personal credit score. This is often the case if you’re a:

  • Sole proprietor: This is the “default” state for a business if you don’t legally form a separate business entity.
  • Single-member LLCs: If you’re an LLC with one member, you do not have to apply for an EIN.

This means you will need a business EIN or TIN to establish separate business credit.

Can You Remind Me How Personal Credit Scores Are Calculated?

Of course we can!

Almost everyone has a personal credit score, based on credit history. There are three main personal credit score agencies in the U.S.: Experian, Equifax, and TransUnion. These agencies gather data about you from lenders and other organizations and use that information to create a score that shows your creditworthiness (i.e. how likely you are to repay a loan or other debt).

Although each agency calculates your score in slightly different ways, the following areas all impact how good your personal credit score will be:

  • Your on-time repayment history: Making regular repayments by the due date will improve your credit score.
  • How much of your available credit you use: Lenders like to see that you don’t use a high percentage of your available credit.
  • How long you have had credit and borrowing accounts: Lenders like to see that you have a history of having credit cards and loans.
  • How many credit accounts you have: Typically, the more credit accounts you have in good standing, the better, although having too many credit accounts may raise a red flag.
  • Previous credit inquiries: Don’t apply for credit too often, fewer inquiries means a better score.
  • Your derogatory marks: False data, ID theft, liens, and bankruptcy can all have a significant negative impact on your personal credit score.

The agencies combine this information to come up with an overall credit score that ranges from 300 (very poor) to 850 (very good) with an average score across the U.S. of 703. The higher your score, the more likely you are to get credit, the lower your interest rates will be, and the more favorable terms you will get.

How is My Business Credit Score Calculated?

There are several business credit agencies, the most well-known being Dun and Bradstreet. Experian and Equifax also have business credit scoring divisions. Just like personal credit, a business’s credit score is tied to its financial history as well as certain other information. Business credit scores are calculated based on:

  • Your business’s repayment history: On-time business repayments on your loans, leases, credit cards, and other business financing all improve your business credit score. 
  • How much of your business’s available credit it uses: Lenders prefer that businesses don’t use a high percentage of their available credit.
  • How long you have had business credit and the number and variety of borrowing accounts: Just like your personal score, business credit lenders will be reassured by organizations that have been in business longer and have a variety of borrowing products across multiple credit accounts.
  • Your business’s legal filings and derogatory marks: Judgements, liens, lawsuits, delinquent taxes, and bankruptcy can all have a significant negative impact on your business credit score.
  • Facts about your business: Business credit agencies will also use several other criteria:
    • The type of industry you operate in: Some sectors are more risk to lend to than others.
    • How long you have been in business: Organizations with longer track records have more reliable cash flow and ability to repay.
    • Other factors: The size of your business, business licenses, assets owned by the business, and tax reporting status.

The credit score for businesses tends to run between 1-100, and the higher the better. Just like personal credit, higher business credit means more favorable terms and lower interest rates.

How Does My Personal Credit Affect My Business Credit?

There are a few ways that your personal credit score and history can impact your business credit score:

1. If You Have No Separate Business Credit

If you don’t have an EIN or TIN, you will not have a separate business credit score—for example, if you’re a sole proprietor. In those cases, a lender will use your personal score and history instead.

2. If You Provide a Personal Guarantee on the Loan

We’ve discussed secured and unsecured business loans before. In many cases, especially if you’re a new business, a lender will insist on a personal guarantee. If you provide one, they will use your personal credit score to decide your creditworthiness.

3. If You Do Not Have a Well-Established Business Borrowing or Credit History

One issue that lenders have is with new or unproven businesses asking to borrow. If your business does not have a long and established credit history, lenders may use your personal credit history to understand their risk in lending to your business. 

Small Business Administration (SBA) loans, for example, require a certain personal credit score to loan out money. Many business credit cards will also take your personal credit score into account.

How Does Business Credit Affect My Personal Credit?

Essentially, if you borrow money and need to provide both an EIN and your SSN, then your business and personal credit scores will be linked for those specific financial products. This means that factors impacting your business credit score—like making on-time payments on a business credit card—may impact your personal score as well.

This does mean that taking out a small business loan may impact your personal score, and vice-versa.

How Do I Maximize My Chances of Getting Approved for a Small Business Loan?

There are a three things you can do to help your business get approved for a loan:

  • Build up your personal credit score by making repayments on time, having a good variety of credit accounts, keeping credit utilization low, avoiding derogatory marks, and building up a longer history.
  • Build up your business credit score by having separate business bank accounts, staying up to date with your repayment commitments, getting credit from vendors, and using the same approach as boosting your personal credit score.
  • Use our guide to boost your chances of getting a small business loan. This includes areas like building a longer business history, getting solid documentation and supporting evidence together, and finding the right lender to work with.

When it comes to boosting your business credit score, practice good financial management, keep your personal credit score up, and understand how the scores impact on each other. Get it right, and you’ll put your business in a great position to borrow.

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Disclaimer:  the information provided on this page is meant for general informational purposes only and may not reflect the most current resources and recommendations available. Please consult with your financial, tax, legal, and other relevant advisors when making decisions about your small business.