The Difference Between Business and Personal Credit

If you are starting or building a business, then you know there are times when you need money.

You need money to grow, pay yourself, and get more clients. Money pays for marketing, more employees, new projects, needed equipment, and more. Where does this money come from?

In the absence of startup capital, positive cash flow, or outside funding, if you must borrow, a business line of credit is your best bet.


Do not be personally responsible for business expenses.

A business line of credit makes your business responsible for repayment. A personal line of credit makes you responsible for repayment. If, for example, you used a personal credit card for business expenses, you would make yourself, not your business, responsible for repayment.

That kind of defeats the purpose of a business doesn’t it? The purpose that is to send money to you, and not the other way around. That’s why you use a business line of credit for business expenses.

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A business line of credit allows you to access money for your business without compromising your personal finances.

That means that if you decided to sell your business, you would still be liable for paying off that debt. In other words, if you started a business and spent $20k on a credit card getting it up and running, and later decided to sell (or close) it, you would have $20,000 to pay back on a business you no longer own.

BLOCs are rarely presented as a solution because they can be tough to get if you have no prior banking history for your business, however it can make a huge difference in the success of your business and its ability to grow.

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Maintain Your Personal Debt to Income Ratio

This solution also enables you to keep your personal debt to a minimum, which increases your buying power when it comes to purchasing a home or other performing assets that may require a loan or credit application, because one of the things a lender takes into account when deciding whether or not to give you a loan is your debt to income ratio (D/I).

Your debt to income ratio is your total monthly minimum debt payments divided by your monthly gross income. Keep this number 20% or less for good financial health, and 36% or less including rent/mortgage.

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How to Build Business Credit

Build business credit using your business Employer Identification Number.

  • Your EIN is a number issued by the IRS that identifies the tax accounts of employers.
  • EIN’s must be used for business entities such as corporations and LLC’s.
  • However a sole proprietor does not have to obtain one

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There are three reasons to establish business credit with your EIN number.

1. It ensures your business, not you, is responsible for repayment.

If for some reason the debt could not be paid, your personal credit would not be affected because creditors could not pursue you for repayment.

2. It increases your ability to get business loans.

Need to buy equipment? Create a marketing budget? Just like with personal credit, the longer you have business credit and positive payment history, the more likely you will be approved for more loans. Of course it’s always important to keep high-interest rate debt to a minimum, however the ability to invest when the time is right, is powerful.

Cash is king, but what if you are just getting started and cash is scarce? That’s where a business loan or business line of credit can help. It’s always good to have access to money when you don’t need it.

Even if you don’t plan to use your line of credit, it’s good to have one just in case. A business line of credit can give you peace of mind and security.

In addition, opening a credit card in your business EIN starts the clock ticking on building your business credit, and the longer you’ve had credit the higher your score will be.

Speaking of your business credit score. This is primarily monitored by Dun and Bradstreet. Accounts can be set up on your behalf by vendors or lenders, and you can also pay to set up your own account if you do not yet have one on file.

3. Your business will be easier to sell

One of the first things you’ll need to do if you want to sell your business is audit accounting. If you have business expenses on personal credit cards, or worse, business expenses intermingled with personal expenses on a credit card, that is an accounting no-no. The best course of action is always to open a credit card in your business EIN and use it solely for business expenses.

Finally, it’s worth mentioning that business credit can be harder to establish than personal credit. Start with where you bank, because your bank can base a credit decision on information in your business bank account alone. They will analyze the deposit and withdrawal history and determine if it meets the criteria of their business lending guidelines.

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