For better or worse, our relationship with money is largely ruled by the almighty credit score. Though it’s an imperfect system, credit scores generally do a fairly good job of tracking an individual’s or company’s track record of repaying borrowed money and therefore their trustworthiness to lenders. We all know a credit score increase can help you meet personal goals like buying a home or a car. But did you know that your business’s credit score is actually separate from your personal, and a business credit score increase can help you secure the financing you need?
We’ll break it down.
What’s the Difference Between a Personal and Business Credit Score?
Personal and business credit scores have many similarities because they are basically measuring the same thing – whether you have a history of paying your bills on time and have enough assets to cover your liabilities. You need to know a few important differences before you start trying to improve your business’s score.
The scale is different. Personal credit scores are measured on a scale of 300-850, while business scores are measured from 0-100.
Different Companies Determine the Score: While Equifax and Experian play a role in personal and business scores, Dunn and Bradstreet is the third partner for business scores and TransUnion is the third for personal scores.
You Should Keep Them Separate: Some sole proprietorships and other small businesses don’t require a separate business score, but it’s a good idea to get an Employee Identification Number (EIN) anyway. This establishes a separate business score.
Business Credit Is Tricky to Build: Your business’s suppliers may not necessarily report your payments specifically, making it challenging to build a stable record. Additionally, it’s more difficult to request corrections to inaccurate information on a business credit score – although it can be done.
How Do I Separate My Personal and Business Credit Scores?
Separating the two scores protects your personal score from damage in the event something goes wrong with the business. It also leaves your personal credit open for personal uses, like an addition to your home or taking a student loan for your child, instead of wrapping it all up in your business.
Make sure your business is an LLC or corporation. This makes your business legally separate from you personally. Keep separate accounts: It’s much easier come tax season if personal and business funds aren’t coming from the same checking and credit card accounts.
How Do I Increase by Business’s Credit Score?
Just as with personal credit, the basics of building a business credit score include reliable repayment of debts and bills. This takes time, but there are a few ways to ensure the process works in your favor.
Pay your bills on time: This is a no-brainer. Set up systems that work for you (or whoever is writing the checks) to make sure every business-related expense is taken care of.
Monitor your Score: Accidents happen, and the quicker you straighten out a mistake, the less damage it will do. Michael’s Pizza doesn’t want to pay the price for unfortunate business decisions made by Michaela’s Pizza, for example.
Credit Utilization Ratio: It sounds complicated, but it really just means that you don’t use all the credit that you could use, essentially proving that you’re not relying exclusively on credit to pay your bills. Aim for a credit utilization ratio under 15%.
Establish New Credit Accounts: If there is a vendor your work with regularly – say, your meat supplier for a restaurant – establish a credit relationship with them so you have additional documentation of reliable payments.
Summary
While some small business owners rely on their personal credit to finance their business, there is a better way. A small credit score increase makes a big difference when it comes to proving your business’s trustworthiness. Spending some time setting up your business credit score for success will pay off in the long run with increased access to financing and personal protections for your own score.
