On one hand, the majority of entrepreneurs view business credit as a tool that may help their business expand and grow much faster.
On the other hand, credit may be a hard concept to master. Sometimes things get even more complicated and the business can’t stay afloat when it comes to applying for business credit.
Did you know that your business’s credit approval depends on your credit score and can either be hindered or improved by it? In this article, we are going to talk about a few cases when business credit can be influenced by the personal credit history and score of entrepreneurs.
If you didn’t register your business as a legal entity with your state, it means you have a sole proprietorship. In this case, your business credit becomes your personal credit. In other words, your company works under your social security number and your name.
Of course, you should track your personal finances separately from business finances for accounting reasons, but lenders will look at them as one unit.
If you are a sole proprietor and you decide to apply for business loans and credit cards, you will be liable for repaying these debts and they will be under your name. Remember that missed or late payments can seriously affect and hurt your credit score.
Make sure you repay the debts in full and in time. Otherwise, your bad personal credit history or score can result in paying higher interest rates. More than that, some lenders won’t even approve your business for new loans.
- Read about all types of business lines of credit.
- How to fund your business.
- Take care of your business habits.
Having an LLC doesn’t mean your personal credit score will influence on your business as much as having a sole proprietorship. Such entrepreneurs have businesses that are called “pass-through entities” when results of your company will be sent on your tax return.
The difference between sole proprietorships and LLCs is that LLCs may have their own tax ID, which is called Employer Identification Number. It allows your business to stand on its own legs when applying for some business loans.
Apart from accounting reasons, there is one more reason why it’s significant to calculate your personal finances separately from business finances. When you need to support your new business credit applications credit companies and most lenders may often ask for your income statement or business tax return.
Some famous people compared corporations with people, and if you have a closer look at them, it turns out that corporations are like people in financial deals.
Corporations pay taxes and have their tax ID numbers as well as bank accounts. In other words, in this case, a personal credit score of entrepreneurs generally is not taken into consideration when applying for new credit cards or loans.
Of course, your credit score and history will be looked at and considered when your corporation applies for a new loan but it’s not that significant as applying for new credit as a sole proprietor.
You may pay for Moody’s, Standard & Poor’s, or Dunn & Bradstreet credit rating for your own company. However, it is generally reserved not for solo ventures or startups but for big companies.
Bear in mind that there may be various types of corporations. Some of them are similar to LLCs and are also viewed as pass-through entities, while others can be more independent when it comes to managing financial decisions.
To sum up, whether you have a sole proprietorship, an LLC, or a corporation, personal credit score and credit history will still influence your business.