Education Library · Foundations · Article 1
An owner can run a profitable company for years and still get turned down for a truck loan, a line of credit or even a house, because the bank looks at the business and sees only the owner. One owner described it this way on a call with us: “it seems like they’re looking at my business as me.” In most cases that’s exactly what’s happening. The business has never built a credit identity of its own, so everything runs through the owner’s personal credit.
What personal credit is
Personal credit is tied to you, through your Social Security number. Equifax, Experian and TransUnion each keep a file on you showing your cards, loans, mortgage, payment history, balances and certain public records. Lenders turn that file into a score, most often a FICO score between 300 and 850.
Personal credit comes with legal protections. The Fair Credit Reporting Act limits who can pull your report, gives you the right to see it, and gives you a process to dispute errors.
What business credit is
Business credit is tied to the company: its legal name, its EIN, its address and its industry. The main business bureaus are Dun & Bradstreet, Experian Business and Equifax Business. Each one builds a file from whatever suppliers, lenders, card issuers and public records report about the company.
Business credit works differently from personal credit in a few ways that surprise owners:
- There’s no single score. Each bureau uses its own scales. D&B’s PAYDEX runs from 1 to 100. Experian’s main business score runs from 300 to 850. Equifax has several, including a 101 to 992 risk score. Lenders may look at one, several or none of them.
- It only shows what gets reported. Plenty of suppliers, lenders and even business card issuers don’t report to the business bureaus at all. You can pay a vendor on time for five years and have nothing to show for it.
- It has fewer protections. Business credit reports aren’t covered by the Fair Credit Reporting Act. In general, anyone with a business reason can buy your company’s report, and each bureau has its own process for fixing errors. The FTC has noted that some small businesses only find out they have a credit report when a supplier turns them down.
How the two get tangled
Most owners start the business on their own credit because that’s the only credit they have. The first truck goes in their name, supply house bills go on a personal card, and a bank line gets opened with their house behind it. Nothing about that is unusual. The problem is that it rarely gets untangled as the business grows.
On our calls the same situations come up again and again:
- Vehicles and equipment financed in the owner’s personal name, sometimes in a spouse’s name when the owner ran out of room.
- Business credit cards that report to the owner’s personal credit, so business spending raises the owner’s personal utilization.
- Business expenses on personal cards, which a lender counts as the owner’s debt even when the business makes the payments.
- Personal guarantees on nearly everything, which tie the owner to the debt even when the account is in the business name.
Why it matters
When business debt sits on personal credit, it counts against you in every personal decision. A mortgage lender or car lender looks at your debt-to-income ratio and sees the company’s trucks and cards as yours. Your score drops when business balances run high, even if everything is paid on time. And when you go to borrow for the business, the lender is looking at the same tired personal file.
A business with its own credit history gives suppliers and lenders something else to look at. Vendors decide whether to extend terms based on it. Fleet programs, equipment lenders and some card issuers can underwrite the business on its own file. Over time, more of the company’s borrowing can stand on the company rather than on you.
Personal credit still matters
For most small businesses, separating the two doesn’t mean personal credit stops mattering. Banks and the SBA will almost always look at the owners of a small company, and most small business loans and cards still involve a personal guarantee. What changes is the weight. A business with a real credit file, clean records and its own payment history can carry more of its own load, and the owner’s personal credit stops absorbing every truck, card and line the company needs.
The first step is knowing what’s already on file for your business, which is the subject of the next article in this series.
This article is educational and isn’t legal, tax, accounting or lending advice. Program rules, lender terms and credit bureau practices change, so verify current terms before acting.
Command your own path.