Most Americans are very familiar with personal credit as it plays a key role in everyday life. Whether you’re financing a car, securing housing, or trying to get a credit card, a personal credit check is part of the process.
Business credit, on the other hand, isn’t as widely understood. It’s easy to overlook because it’s not required to start a business, and many assume it’s only accessible for large businesses. But the truth is, it can be a powerful tool for small business owners — helping you secure financing, access better terms, and protect your personal finances.
Here’s a closer look at personal vs. business credit and how leveraging both can work in your favor.
What is personal credit?
Personal credit refers to an individual’s credit reports and scores which are tied to their social security number (SSN). When consumers in the U.S. want to get a personal credit product — such as a credit card, personal loan, mortgage, or car loan — here’s how the process works:
- You apply with a lender and provide your SSN.
- Lenders use your SSN to check your credit with at least one of the three main consumer credit bureaus; Transunion, Experian, or Equifax.
- Lenders consider your creditworthiness along with other factors like income and outstanding debt to determine if you qualify for the credit product and upon what terms. The interest rate is typically tied to your likelihood of default.
- Upon approval, lenders open a credit account in your name and report your monthly payment activity to one or more of the consumer credit bureaus.
If you consistently manage credit responsibly, your credit reports and scores will eventually show that you’re a reliable borrower who pays your debts as agreed. As a result, you can gradually get approved for a wider range of personal credit products with higher loan amounts, longer terms, and lower interest rates.
What is business credit?
Business credit refers to a business entity’s credit reports and scores which are tied to its federal employer identification number (EIN). When a U.S. business wants to get credit for business purposes — such as business credit cards, real estate loans, equipment loans, and commercial auto loans — here’s how the process works:
- The business must apply using its EIN. Some lenders also require a personal guarantee which requires an owner to provide their SSN.
- Lenders use the EIN to check the business’s credit report, often with either Dun & Bradstreet (D&B), Equifax Business, or Experian Business.
- Business lenders assess a business’s creditworthiness along with other factors like revenue, time in business, industry risk, and existing debt to make an approval decision. When a personal guarantee is required, they’ll also review the owner’s personal credit.
- Upon approval, lenders open a credit account for your business. Reporting on credit accounts varies from lender to lender. Some don’t report at all, some only report negative information, and some report all information including on-time monthly payments.
You can build business credit by opening business credit accounts with companies that report positive information to one or more of the business credit reporting agencies. Over time, if you manage them responsibly, your growing credit can grant you access to more credit options and better terms. Additionally, the stronger your business credit, the higher the likelihood that you’ll get approved without a personal guarantee.
Key differences between business and personal credit
The main difference between business and personal credit is that business credit is tied to the EIN of a business entity while personal credit is tied to the SSN of an individual. As a result, business entities are typically liable for business debts while individuals are liable for personal debts.
However, if a business lender requires a personal guarantee from you, you’ll be personally liable for the business debt if the business can’t cover it. Additionally, if you have a business structure that doesn’t provide liability protection (e.g. sole proprietorship and general partnerships), you’ll also be personally liable for your business’s debts.
Another key difference is the way each type of credit is used. Business credit is intended to finance business-related expenses, whereas personal credit is generally used for personal financial needs. Keeping your expenses separate is important for accounting clarity and liability protection.
Additionally, business and personal credit are tracked separately. Consumer credit is monitored by the three major consumer credit bureaus — Experian, Equifax, and TransUnion — while business credit is primarily tracked by D&B, Experian Business, and Equifax Business. Although Experian and Equifax report on both personal and business credit, they have different divisions and reports for each.
Benefits of building business and personal credit
Having strong personal or business credit is beneficial — but having both is better. Here are a few reasons why:
- Access to more financing options: Strong business and personal credit will expand your borrowing power. You’ll have access to loan amounts and credit limits based on your business revenue in addition to your personal income.
- Lower interest rates and better terms: Good credit reduces the risk you present to lenders which can lead to lower interest rates, fewer fees, higher loan amounts, and longer terms on both business and personal financing.
- Keep business and personal finances separate: Good business credit allows you to finance business expenses with business loans, reducing the need to tap into your personal credit for business purposes. This leaves your personal credit available for personal needs and may protect you from personal liability for business debts.
- Improved reputation and credibility: Good business and personal credit help with more than just getting loans. A solid business credit profile also makes your company more attractive to partners, investors, lessors, and suppliers, while good personal credit strengthens trust with landlords, employers, and insurers.
Key mistakes to avoid
As you work on building business and personal credit, there are a few key mistakes you’ll want to avoid.
First, don’t miss payments or pay late. Payment history is one of the most important factors for both personal and business credit scores. Late or missed payments can significantly hurt your credibility and make it harder to access financing.
Next, watch your credit utilization. Whether for business or personal credit, try to keep your outstanding revolving credit line balances below 30% of your available credit. High utilization can signal financial strain and negatively impact your score.
Lastly, don’t ignore your credit reports. Regularly review both your personal and business credit reports for errors or signs of identity theft. If you spot inaccuracies, report them to the credit bureau immediately to prevent unnecessary damage to your score.
Take Full Advantage of Business and Personal Credit
Strong business credit can be a huge asset for small business owners. It helps your business establish a reputation as an independent entity, which can open doors to financing, partnerships, investments, and other opportunities. Further, it can reduce the need for personal guarantees, which can help protect you from personal liability for business debts.
If you’re not sure how to get started, Lili recently teamed up with D&B to help out. All you need to do is open a Lili business checking account and sync your financial data with D&B Credit Insights. Then, after using the account for six months, your transaction history can begin influencing key D&B business scores.1
Get started with a Lili business checking account!
1By integrating your Lili Business Bank Account through the D&B Credit Insights banking integration feature, there may be potential for you to positively impact your Delinquency and Failure Scores. Dun & Bradstreet requires a minimum of six months of business banking transaction history to be able to potentially impact these scores.
