If you’re just starting, it’s essential to understand the differences between business and personal credit and how you can begin building business credit. Here’s what you need to know:
Building credit for your business vs. personal credit
Unlike personal credit, which is tied to your Social Security Number, business credit is linked to your Employers Identification Number (EIN). Here are the key differences between the two:
- Personal credit is reported to consumer credit bureaus such as Equifax, Experian, and TransUnion, while business credit is reported to business credit bureaus such as Dun & Bradstreet, Equifax, and Experian.
- Personal credit reports typically include information about your credit history, employment history, and salary. Business credit reports, on the other hand, may include information about your company’s financials, payment history, and business structure.
- Personal credit scores are calculated using the FICO model, while business credit scores can be calculated using the Dun & Bradstreet PAYDEX model or Experian’s Intelliscore Plus. Generally speaking, it’s easier to improve a business credit score than a personal one.
CAN SOLE PROPRIETORS ESTABLISH BUSINESS CREDIT?
Sole proprietors don’t necessarily need an EIN to run their business for tax purposes, but if they want to establish business credit, they’ll need one. This also means they’ll need to open a business bank account separate from their personal accounts.
Why is building credit for your business important?
Establishing business credit is critical because it protects your personal assets if trouble arises. If you use personal credit to run your business, you put yourself and your family at risk if the company goes bankrupt. Creditors will have access to your personal accounts, and you’ll be personally responsible for covering the expenses.
How to get started building credit for your business.
After registering your business and obtaining an EIN, you can request a business credit card from a banking institution. A business credit card is an easy way to build a good credit history, provided you pay on time and keep the balance low or at zero every month. Here are some other ways to establish business credit:
- Establish credit with suppliers: Some suppliers and vendors report payments to business credit bureaus, so working with them and paying on time can help build your business credit.
- Obtain trade lines: Trade lines can include credit accounts for goods or services that your business uses regularly, such as a vendor that provides your office supplies or a supplier that provides the raw materials for your products.
- Apply for a small business loan: Applying for and paying back a small business loan can help establish your business’s creditworthiness. You’ll need to get a D-U-N-S number before doing this, which simply requires registering your business with the Dun and Bradstreet bureau.
If you’re interested in building credit for your business, get in touch with us to learn more about your options.