Credit is credit, right? Not so fast. A big misunderstanding that many small business owners have is assuming that their personal credit is the same as their business credit. In fact, these two factors are very different and can impact an individual’s financial future in multiple ways. Assuming that a negative personal credit score will make it impossible to get small business loans is just one of the misconceptions people have regarding business vs. personal credit.
PERSONAL CREDIT AND BUSINESS CREDIT DIFFERENCES
According to All Business, there are three major differences between personal credit and business credit. These differences include:
USE OF A SOCIAL SECURITY NUMBER VS. FEDERAL TAX IDENTIFICATION NUMBER
It is a good small business practice to separate one’s personal information from the business. To do this, an individual representing the company must request a free, federal tax identification number. This number should be used for all business transactions moving forward, and is required to open a business bank account, take out small business loans, and access many other vendor accounts.
PERSONAL CREDIT SCORE VS. SMALL BUSINESS CREDIT SCORE
It can be a little confusing, but a personal credit score and a business credit score are very different. Businesses are measured on the number of years they’ve been in business, small business loan repayment history, the industry that the business operates in, and the amount of debt carried. Personal credit scores are most often based on FICO, which has over 80 criteria for assigning a score.
PERSONAL CREDIT FILE VS. SMALL BUSINESS CREDIT FILE
Each business starts developing a credit file from the moment it is an entity, while personal credit starts once an individual begins using credit. While an individual must only have one credit score, he or she may have multiple business credit files that belong to several different businesses.
SMALL BUSINESS LOANS – GOOD FOR BUSINESS CREDIT HISTORY
Now that you have a better idea of how personal credit and business credit differ in the real-world, you can see how important it is to both separate these areas and maintain good financial practices. One area where small business owners struggle is resisting the temptation to dip into personal money to pay for business needs. According to The Balance, this can create a situation that all small businesses dread – getting audited by the IRS. Additionally, it doesn’t make thing easy when allocating personal income and business income, nor does it support the business as a separate entity, which can cause the business to be misidentified as a hobby.
A good way to manage your small business finances is to establish a clearly defined line between your personal and business income by taking on small business loans. The advantages of this decision are many:
EASY ACCESS TO CASH TO PAY FOR BUSINESS NEEDS
Small business loans make it possible to obtain the right amount of money to pay for business needs, and with less of the hassles of other methods. This means, your business can pay for new equipment, inventory, and systems to run smoothly. Cash flow can be managed better.
NO NEED TO BORROW FROM FAMILY OR FRIENDS
There’s an old saying that money and relationships should never mix. Having to resort to borrowing money from personal family or friends blurs the line between personal and professional. It can cause a great deal of tension and can ruin relationships. Don’t risk this. Take out a small business loan instead from a reputable company like United Capital Source.
FLEXIBLE REPAYMENT TERMS REDUCE WORRIES
It’s one thing to take out small business loans; it’s another to worry then over missing a future payment. Avoid this stress by working with a lender that provides flexible repayment options, and help when times are tough. You may also be able to refinance or take out another loan to pay off an existing one at a lower interest rate.
HELPS TO BUILD A SMALL BUSINESS CREDIT LINE
As mentioned previously, having a good business line of credit that is separate from any personal credit is what a small business owner needs to strive for. A small business loan can be a great way to accomplish this, while adding much needed capital to the company. Small business loans are relatively easy to obtain, because they are based on your length of time in business, the amount of your monthly revenues, and your ability to repay.
REBUILDS A PREVIOUSLY SPOTTY CREDIT RATING
If the small business has had previous issues with either no or poor credit, bad credit business loans can help to improve the business credit rating. Paying all payments early and on time helps to rebuild credit. A strong payment history is what a business needs to get ahead, and to earn additional accounts with vendors and even clients.
FUTURE OPPORTUNITIES TO BORROW MORE FUNDS
It’s wise to establish a partnership with a financial leader that can be an AAA-plus reference for your business. If you handle things well, and pay your debts carefully, you will be able to borrow more and larger amounts of money in the future. You can also qualify for other sources of funding, like business credit cards and special merchant advance programs.
WHEN THE BUSINESS THRIVES, YOUR PERSONAL FINANCES IMPROVE TOO
Now that you have a better understanding of the differences between your personal credit and your business credit, plus the key advantages of taking out a small business loan, you can see how they are all tied together.
Having a strong financial plan for managing business finances directly helps to improve your total financial outlook, so that you can focus on balance between the business and your personal life. This is all made possible by the support of companies like United Capital Source that have years of experience helping small businesses just like yours achieve dreams through smarter financing. Be sure to explore the many creative options in small business loans, merchant cash advances, and receivable factoring programs available to you.