The separation of personal credit and business credit isn’t always black and white. Here’s what you need to know when establishing new business credit.
The Impact Your Personal Credit May Have When Establishing a New Business
Starting a new business can be a nerve-wracking and expensive undertaking. With payroll to meet, supplies to purchase, and various start-up costs, it’s easy to run out of cash before the monthly receivables start rolling in.
When establishing a new business, you’ll likely need a company credit card and perhaps even a business loan to get up and running. In order to get approved for either, lenders may look at your current cash flow, income statements, and balance sheets – among other factors, when determining their decision. However, if you are a brand new business and don’t have the proven financials of a more established company – yes, your personal credit may play a role in the approval process. Your personal credit may also help determine the business credit card or loan terms – if any, you may be offered.
With these factors in mind, if your personal credit scores are on the low end, it’s wise to take steps to improve your own creditworthiness before you inquire about a new line of business credit. For access to a variety of online tools you can use to improve your personal credit, click here to register for ScoreShuttle.
Other Factors Business Lenders May Consider
Outside of credit, here are some other factors business lenders could look at.
• The nature of the business. Opening a business that’s highly competitive or in an over-saturated area could negatively impact your ability to obtain a new line of business credit.
• Current clients. The number of clients your business already has and the dollar value of their business is another factor lenders may consider. If you can demonstrate a loyal client base, that will be one more factor in your favor.
• Economic conditions. The overall state of the economy can also factor heavily into your ability to obtain a new line of business credit. Unlike some other items on this list, macroeconomic conditions are beyond your control. However, they are still important for lenders concerned about their own balance sheets.
• Your ability to provide collateral. The presence of collateral may make it easier to obtain credit and financing for your business. Putting up business equipment, real estate, and other forms of collateral may improve the perceived creditworthiness of your new company.
Does Business Credit Impact Your Personal Credit?
If you are approved for a line of business credit, such as a company credit card or business loan – yes, it is possible for your business credit to potentially impact your personal credit. However, the real answer to this question is not a hard ‘yes’ or ‘no’ for all. This is because it depends on a variety of personal factors. These could include how your business is set up, your payment activity, as well as each lender’s unique business reporting policy.
If you set up your business as a sole proprietor, meaning all accounts are tied to you personally, then your business activity will likely impact your personal credit scores. Alternately, if you establish your business as a separate entity, such as an LLC, then your business’s financial activity may or may not be reported to the three consumer credit bureaus.
The ultimate answer to this question is determined by your specific business lender. Some lenders may keep your business activity separate from your personal consumer profile. Others may choose to report financial activity associated with your business accounts on the consumer level – especially if you miss or are late on payments.
Regardless of the types of credit you obtain, on-time payments and practicing responsible financial activity can help you maintain excellent credit for both your business and your personal credit portfolio.
Disclaimer: The information contained is for educational purposes only and is not legal advice. The information is general in nature and is the opinion of ScoreShuttle alone, not of any bank, credit issuer, lender, or other business and has not been reviewed, approved, or otherwise endorsed by any of these entities.