Business Credit Vs. Personal Credit

Personal credit is just that, personal. Business credit, however, is far more complex and should never be used for personal reasons. Many will use their personal credit to fund business ventures, but it cannot ever work the other way around.

Let’s look at the difference between the two.

Personal credit is usually referred to as consumer credit. One definition states: Consumer credit is the amount of credit used by consumers to purchase non-investment goods or services that are consumed and whose value depreciates quickly. This includes automobiles, recreational vehicles (RVs), education, boat and trailer loans but excludes debts taken out to purchase real estate or margin on investment accounts. For example, a mortgage for purchasing a house is not consumer credit. However, the 52 inch television you put on your credit card is.

By comparison, business credit, which is also referred to as trade credit or commercial credit is the amount of credit used by businesses in transactions with vendors and investors and can range from a few hundred dollars to millions of dollars. Business credit is far more complex than personal or consumer credit.

Small business owners often get started by using their personal assets and credit. While this may be an effective strategy in the beginning, eventually it will become clear that personal and business credit should be kept separate. One reason is that your business could cause your personal credit to suffer.

Here’s how:

• Your social security number

When you use your social security number to apply for business credit, even if it’s only for a couple of hundred dollars at your local office supply store, there is an inquiry into your personal credit history.Too many inquiries within a short period of time lower your credit score. When building business credit, there can be as many as twenty or more inquires per month, which can negatively affect personal credit.

• Cash advances

If you use your personal credit cards for cash advances to pay for business expenses or to improve cash flow, your personal credit score may drop. If the cash advance is reported, it could negatively affect your personal credit rating.

• Personal credit cards for business expenses

While using personal credit for business expenses might seem fine, you want to avoid the temptation since doing so can negatively affect your credit score by increasing the amount of your liability, which can then lower your credit score.

• Declined credit

If you are declined for personal credit, especially more than once, your overall credit score will be negatively affected. This lowers your chances of getting business credit.  The majority of loans for businesses are declined because of this.

Despite the problems with using your personal credit for business transactions, there are times when you still might find it necessary to use your personal credit. While it is not always possible to keep business and personal credit one hundred percent separated, an effort should be made at all times.

If you must use your personal credit in order to get a business loan, there are a couple of main points to remember.

• FICO Score

The higher your FICO score, the better. A higher score translates to lower interest rates. When it comes to using your personal credit for business, a higher score can make a difference. Most lenders will not approve your business loan if your personal FICO score is below 680.

• Loan to Value Ratio (LTV)

When using personal assets to secure a business loan, you need to keep in mind that most creditors want at least an 80% loan to value ratio (LTV.) This means that in order to get an $80,000 loan, your assets must be at least worth $100,000. This is similar to home mortgage loans that require 20% down.
   
• Declined Credit

As discussed, declined credit could mean a lowered personal credit score. However, if while using your personal credit to secure business loans, you have accumulated too many declined business credit applications, not only will your personal credit suffer, but more than likely you will have permanently damaged your business credit.

• Personal Bankruptcy

If you have filed for personal bankruptcy within the past seven years, creditors will be cautious before approving your business loan, and more than likely your application will be declined. Declined applications mean the death of business credit.