Business Credit Vs. Personal Credit
There are major differences between business credit and personal credit that every business owner should pay attention to. And, from credit capacity to credit scores, the differences reinforce the importance to every business owner of building business credit separate from personal credit. Here is a detailed comparison.
Social Security Number Vs. Employer Identification Number
Your SSN is your unique nine-digit number issued to you by the government so you can pay taxes and pay into the Social Security system. This same number is used by the major consumer credit agencies in the creation of your personal credit files. Whenever you apply for credit, all the personal information you disclose on an application can be shared with the credit agency that the creditor subscribes to.
An employer identification number is the corporate equivalent of a Social Security number. It’s a nine-digit number the Internal Revenue System assigns to business entities operating in the United States to identify each company. When you incorporate your business, you can apply for this number, and it will be the number that’s used to create your file with business credit agencies.
The major difference here is that, even though you’re only ever issued one Social Security number, as a business owner you can obtain multiple EINs if you own multiple companies.
Personal Credit File Vs. Business Credit File
As a consumer you have the ability to establish one credit file with each of the major credit agencies. This file stays with you, so if you face difficulty -- if you file for bankruptcy, for example -- you can expect it to show in your personal credit file for at least 10 years.
But when it comes to business credit files, you’re not limited to a single file. If you own several companies, you can create a separate credit file for each business by using its unique EIN. This gives you the opportunity to establish multiple business credit files with the business credit bureaus.
Personal Credit Score Vs. Business Credit Score
The consumer credit scoring model most widely used by lenders is FICO. However, when it comes to business credit scores there is no dominant scoring model used. Each business credit bureau has its own scoring system and lenders have the option to choose from among them. Another difference between personal credit scores and business credit scores is the way the scores are calculated.
For example, the FICO scoring system has 88 rating factors that can negatively impact your personal credit score and only six positive ones. Worse, you have control over only five of these factors.
Business credit scoring systems are primarily based on how your business pays its bills, how much debt you carry, and what type of industry your business operates in. It’s much easier to understand, maintain, and improve a business credit score than a personal credit score.
Credit Capacity
Your business credit capacity is much larger than your personal credit capacity. Business credit gives you 10 to 100 times more credit capacity, so your ability to raise the funds you need to grow your business is much greater.
When you use personal credit to apply for business financing, your mortgage, auto loan, credit cards, and even student loans affect your ability to qualify. This is not true in the case of business credit.
Even better, if you own several companies, each of the businesses will have its own credit capacity, giving you almost unlimited financing potential.
As you can see, the differences between personal credit and business credit are quite significant, and understanding them is the first step to using them to your advantage.
Marco Carbajo is founder of Business Credit Insider's Circle. For more information on business credit for small business, you can read his blog or follow him on Twitter@MarcoCarbajo.
