Updated: Mar 12, 2021
Why is it important to separate your business credit from your personal credit?
While your business and personal credit reports are separate, small business owners often use their personal credit to apply for and secure credit accounts used for their business. Although it may seem necessary when starting out, using your personal name and credit when applying for a business account can be risky.
How Your Personal Credit Can Be Impacted by Your Business
Using your personal credit when applying for an account means that you are agreeing to be personally responsible for the debt. As a result, that account and its payment history may appear on your personal credit history as well as your business credit history.
If your business encounters financial difficulty and you are unable to manage those debts, your personal credit can be negatively impacted. Therefore, it's important to understand the risks associated with using your individual credit history to obtain business credit before opening accounts in your name.
If you do have to use your personal credit to obtain accounts you can use for your business expenses, separating your personal credit from your business's credit as soon as possible will help protect both.
How Can Your Business Be Affected by Your Personal Credit?
Just as your personal credit can be affected by your business, your business can be impacted by your personal credit. When you are first starting out, the strength of your personal credit may play a big role in getting the credit you need to get your business off the ground. This can prove much more challenging if your personal credit isn’t up to par.
On the other hand, if your own credit is strong enough to qualify for the business credit you need, it can be of great benefit to your company. However, keeping all your business credit under your personal name means you won’t be establishing a strong business credit report. Ideally, you should transition to using business accounts in your company’s name as soon as you can so that you can begin building a strong credit history for your business as well.
To do this, you’ll need to legally register your business. For small businesses, one option is to form an LLC (limited liability company) to ensure your company is seen as a separate business entity. Once you do that, you can begin to apply for business accounts in your company's name.
Subscribe to the Digital Orange Juice for juicy ideas and the people who fund them. You can find out about our next pitch competitions here. Don't forget to check out the SheRaise platform for more pitch events.