How Good Personal Credit Could Help Small Business Owners
Discover ways that good personal credit can help small business owners.
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There are many personal benefits you may be able to enjoy when you earn a good FICO® Score. Yet you might not realize that good personal credit has the potential to make things easier for your small business as well. Read on to discover three ways you might be able to leverage a good FICO Score to your advantage as a small business owner.
It might be easier to qualify for small business financing.
After you register a small business with your state (like a corporation or LLC) and file for an Employer Identification Number (EIN) from the IRS, you may have the opportunity to establish credit for your business. Yet even if you build good business credit, your personal credit could still influence your ability to access certain types of small business capital (e.g., business loans, SBA loans, business credit cards, business lines of credit, etc.).
Lenders often see small businesses as extensions of their owners. As a result, a lender might want to review how you've managed personal credit obligations in the past before deciding whether to approve your application for business financing. And certain credit scoring systems, like the FICO® Small Business Scoring Service℠ (SBSS℠), may consider factors from both personal and business credit information.
Your business could receive better financing offers.
Not only could a good personal credit score potentially improve your odds of qualifying for small business financing, but it might also lead to better loan offers too. Lenders in both the consumer and small business space often reserve their most attractive financing offers for applicants with good to exceptional FICO® Scores.
Of course, it's important to make sure your business satisfies a lender's qualification criteria in other areas as well. A good FICO® Score alone doesn't guarantee you a loan approval or a lower interest rate. Your company's time in business, financial details, existing debt obligations and other details could also play a role in its ability to qualify for competitive small business financing options.
You could help your business establish credit of its own.
Good business credit can be a valuable asset for a small business (just as a good FICO® Score could benefit you as an individual). If you already have good personal credit, you may find that it's easier to establish business credit in your company's name.
Building good business credit starts with opening business tradelines and accounts from suppliers and vendors that report to the business credit reporting agencies (e.g., Dun & Bradstreet, Experian, and Equifax). If you have good FICO® Scores based off your consumer credit reports, it might help you qualify—depending on the lender's approval criteria.
If a lender does approve you for a business tradeline, the next step is to manage the account in a responsible way. It's critical to pay your business credit obligations on time, keep your credit utilization ratio low on business credit cards, and maintain other good credit management habits. Otherwise, the account or tradeline you opened to help establish your business credit profile could wind up hurting your business credit score instead.
Separating Business and Personal Finances
It's typically wise to keep your personal and business separate as much as possible. The same goes for your personal and business credit. Nonetheless, there are times as a small business owner when these two worlds may intertwine.
As mentioned, a business lender may review your personal credit when you apply for commercial financing for your small business. You might also find that some business lenders will require you to sign a personal guarantee when you take out certain business loans. (A personal guarantee means that you agree to accept liability for a debt if your business fails to repay according to the terms of its financing agreement.)
Yet you should still aim to separate business and personal matters when you can. Instead of putting business-related charges on a personal credit card, for example, you might consider opening a business credit card instead. Just be sure to find out the card issuer's credit reporting policy. If a credit card company reports a small business credit card to the consumer credit bureaus, the account (and the credit utilization ratio on that account) could still impact your personal FICO® Scores.
Bottom Line
Good personal credit has the potential to smooth the way for small business owners in several areas. From helping you obtain affordable business funding to making it possible for your company establish good credit of its own, there are many ways that good personal credit could make your small business journey easier to navigate.
If you want to manage your personal credit, you can learn more about the habits of individuals with excellent FICO® Scores. It may also be helpful to understand that factors that make up your FICO Scores in the first place.
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Michelle Black, Founder of CreditWriter.com is a leading credit expert, financial writer, and speaker with nearly two decades of experience. Her work has been featured with major outlets such as Forbes, Reader's Digest, and U.S. News and World Report.