When you own a small business, it may be hard to distinguish between personal and business credit. If you have chosen to run as a sole proprietor it may not even be necessary to separate them, depending on the size of your operation. Of course, if you want to keep them separate as a sole owner you can.
If you have chosen any other way to operate your company, you will need to have the two separate. Meaning that your personal credit is your own, and the business credit will be strictly for the company.
When you are talking about your personal credit the most important thing that you need to remember is FICO. It is the score used by the Fair Isaac Corporation to decide how credit worthy you are. They use a combination of aspects about you, and your life, to obtain this score. Let us break them all down for you.
- Payment History-This is the single most important aspect of your FICO score. It is 35% of the number that is assigned to you on a personal level. It is factored by monitoring how well you pay on things. You need to pay things on time, when they are due, and for the amounts that are charged. This includes all your payments, even your utilities and rent.
- Accounts Owed-This makes up 30% of the score. It pertains to how many accounts that you have open, compared to how much you owe. You have heard that you want to keep your spending to under thirty percent of your limits, this is why. You can have a large amount of outstanding debt and still have a good score, simply because you are not close to having them maxed out.
- Length of Credit History-This one is easy to understand, and it makes up 15% of your score. The longer your accounts are open, the better your score will be. It shows stability and responsibility. So when you use the iSelect’s personal loan comparison site and get yourself a small loan, the credit history score will go down, but the accounts score should go up, as well as one below that we have not discussed yet.
- Credit Mix-This will be about 10% of your score. It is based on the variety of accounts that you have. If the only accounts that you have open are utilities, your score will be less than if you had a loan and some credit cards open. The more, the merrier, so to say.
- New Credit-This will make up 10% of your score. As you would imagine this number is calculated by how many new accounts you have open.
FICO scores are that simple and are set in stone when it comes to lenders. If they have a low number set, they will not budge from it. Even if you are only one point under their number. So go ahead and work on your personal credit score through the companies that monitor that, but do not ignore the aspects that FICO takes into account, because they are used 90% of the time.
As you would expect, this credit number is usually easier to increase because it goes off less information than your personal credit. Business credit can be built up faster than your personal credit, and it can be detrimental if you plan to get any business loans.
- Credit History-Once again, this is one of the most important sections of your number. Your business credit number, that is. Make all your payments on time when they are due, and for the amounts that are billed.
- Demographics-This is also taken into account. It includes your industry type, how many employees you have, and how long you have been in business.
- Public records-This will be a collection of any public records related to your business, such as bankruptcies and judgements against you.
Differencies broken down
It may seem simple to distinguish the two, and as a general rule it is. If you have only been in business for a brief time, though, lenders and credit applications may require you to use your personal credit with your business credit. It is simply because your business has not been operating long enough to have built up a number that truly reflects your company.
It is also important to remember that you cannot challenge anything on your business credit account, like you can with your personal one. If you want you can make a statement about an issue that you see on your business one, but the companies do not have to respond to your query, and most of the time they will not. Your company number is your company number, and that is that.
Another difference that you may not be aware of is that your personal credit stays with you for the duration of your life. Your business credit will stay with the business, even if you sell it. So, if your business score is low the new owners will inherit the low score with the business, which is one of the deciding factors that you will have to face if you choose to sell your business.
The final difference between the two that can affect you is the amounts of credit and the amount of the loans that are given to the two. Your business credit limits, and loan amounts, can be substantially more than your personal ones, by up to two thirds more. For example, business loans can go up to a million dollars, while personal loans usually max out at around $30k.
That may seem like a lot of information, but it is actually simple. Your personal credit limit reflects how you run your affairs, while business credit is based on how you run your business affairs. Keeping them separate is important if you want to establish the two separate entities. If you are running a small company form your home, behind a computer, you may not need the two separated. But in the end, that is a decision that you will need to make.