Many business owners do not realize that their business credit history can be kept separate from their personal credit history. While it is true that a good number of small business owners use personal credit to build their businesses — banks do like seeing personal responsibility — the eventual separation of personal and business credit does have many advantages.
Business credit is similar to personal credit as both are measured by credit scores determined by private agencies. While consumer credit scores are usually based on a scale from 300 to 900, business scores are measured on their own scale of zero to 100.
The following are great reasons to consider only using your business credit score for business uses:
1) One of the most important reasons for using your business credit score is that it won’t affect your personal credit history. That’s good, because businesses can make the occasional late payment on a loan or bill, but that won’t affect your personal credit. It’s a great way of keeping your personal and business finances separate.
2) If business and personal credit are separated, there is less chance of using personal funds for business or using business funds to pay for personal items. This practice is called commingling and is best avoided because then things get really sticky with the IRS. If you’re writing off business expenses, but they see personal expenses in there, you could get in trouble.
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3) All businesses should attempt to limit any personal liability. If a company has a solid credit rating, new lenders may not require personal guarantees and they shouldn’t have to. Lenders should only be concerned about your business’s ability to payback its loan — not you personally.
4) Personal debt should be minimized. Businesses require hefty lines of credit and pure business credit is preferable than the alternative — significant use of personal credit lines. Inflating your personal credit lines can be dangerous and prevent you from getting a persona loan for a new car or a mortgage for a home. Again, keep your business and personal finances separate.
5) Large commercial lenders may not even consider loan applications from those businesses who have not secured any business credit. There are more financing opportunities available to those companies who have a solid credit history.
6) When business is sold, potential buyers first look to the assets of the business. One of the most valuable assets is a large line of business credit. Build that up and that sale will be even more lucrative to you.
7) Business credit limits are many times more substantial and can offer superior interest rates and terms. For example, while a personal business credit card may come with rates as high as 27 percent, a business loan may be available with a 10 to 13 percent interest rate.
Especially in today’s challenging economic times, entrepreneurs use creative methods to finance their businesses.
Sources such as personal credit cards, family loans and even payday and auto title loan services have been utilized to raise capital. While the ingenuity of business owners is to be admired, those who can use the more traditional methods of business financing will find that they are rewarded with lower rates, consistent capital availability and less personal liability.
About the Author: As an attorney who specializes in business IRS tax controversy, Jana Olson has helped many business owners improve their credit ratings by working through IRS levies and fines.