The Benefits of Separating Personal and Business Credit

Learn why it's important to keep personal and business credits separate and how it can help protect your assets and improve your business prospects.

The Benefits of Separating Personal and Business Credit

It is essential to keep personal and business credit separate as much as possible. Although you may do your best to keep them apart, both can still have an effect on your business. The extent of the impact depends on the lender or loan issuer. Business credit is based on the financial history of your company, such as with a business credit card or a small loan.

Unlike personal credit, which is linked to your social security number, business credit is connected to your employer identification number (EIN) or business tax identification number. If you don't have an EIN, you can apply for one online. This number allows the government to recognize your company for tax purposes. It's important to note that if you're a sole proprietorship with no employees or a single-member LLC with no employees, you technically don't need an EIN.

In this case, your company's credit would be linked to your social security number and, therefore, to your personal credit. However, it is generally accepted that business credit is separate from personal credit. While the three major credit bureaus track your personal credit history, Experian and Equifax, as well as other reporting services that are specifically for businesses, record your company's credit history. One of the most well-known business-only credit reporters is Dun & Bradstreet.

Additionally, because your business credit is linked to your EIN, your business credit history will follow you at any company where you use that number. Banks and lenders use your personal credit score to determine whether giving you a good credit rating also means you'll be entitled to lower interest rates on loans. When business owners don't separate their personal finances from those of their company, this can expose their company to financial credit liability. Keeping business and personal finances (and, by extension, your credit) separate can not only make accounting easier but also help protect your personal assets and liabilities and even improve your business credit prospects.

Because your goal is to build business credit, a lender who reports to the credit bureaus can help you increase your ratings. In many cases, you won't be able to buy goods and services for your business without access to credit. A survey reported that 20% of business loan applications were denied due to poor business credit. Business and personal credit contain different information, so the scores aren't necessarily correlated.

While there may be some connection between your business and personal credits in certain cases, you can take steps to keep them apart as your business grows. On the one hand, personal and business credit reports are based on different information and may be completely separate. However, because the same metrics are used by the credit bureaus for both ratings and because personal credit is sometimes used instead of business credit (for sole proprietors), there is some confusion about how to create and maintain each form of credit separately. Your company's credit history is linked to you by your employer identification number (EIN) or tax identification number, which is how the government recognizes your business for tax purposes.