Small business owners know all too well how difficult it can be to get a commercial loan. In fact, over 50 percent of loan applications for small businesses are rejected. Typically, this is due to poor or no credit history.
Personal loans and financial support from friends and family are how many owners fund their business. Unfortunately, this comes with a lot of risk, including damaging personal relationships.
Whether you need a loan or small business line of credit, it’s important to keep your personal and business credit separate. Building your company’s credit profile opens the door to funding you won’t get based off personal credit history.
The following are five reasons you need to keep your credit profiles separate. It’s easier to do than you think, and it’s a smart move for the long-term success of your business.
1. Personal and Financial Liability
In the beginning, it’s common to use your own capital to cover costs. However, as the business grows, your personal and business finances should not overlap. Doing so guarantees business setbacks don’t impact your personal financial situation.
Using your personal credit to secure financing puts your private assets at risk. If the business fails or gets sued, the cost of the loan could be taken from your personal savings.
2. Access to Tax Deductions
If you want to deduct business expenses on your taxes, open a business checking account. Using this, along with a line of credit, makes it easy to identify expenditures and deductions.
On the surface, it seems contradictory that keeping separate finances streamlines your bookkeeping. However, the IRS has rules about mixing business and personal expenses. You’ll protect yourself and save time by keeping your business profile separate.
3. Protect Your Personal Credit
Relying on your personal credit to run your business is a surefire way to max out your credit lines. A high utilization rate, especially if you start missing payments, can have a negative impact on your personal credit score.
How serious is this issue? If you max out your cards that are funding business operations, your score could drop by 100 points.
4. Put Your Business on the Map
Whether you register as a sole proprietor, LLC, or another alternative, you should establish your business a separate legal entity. Doing so protects your personal assets from lawsuits, losses, and debts that affect your business. A tax advisor, financial planner, or lawyer can help you determine which entity best fits your needs.
Apply for your Employer Identification Number (EIN) with the IRS. You don’t technically need it as a sole proprietor, but it’s necessary for establishing business credit.
You don’t have to have months or years of establishment before you start building business credit. To start the process, request a Dunn’s number. This number is for your business what your social security number is for your personal credit. It puts your company on the map with the three major business credit bureaus — Equifax, Experian, and Dunn & Bradstreet.
5. Build Your Business Credit
With a personal credit score, the odds are often stacked against you. The FICO system has six elements that can increase your score, but eighty-eight variables that can decrease it. Fortunately, credit ratings for businesses are more straightforward. They’re primarily focused on how the bills are paid.
Because your business credit score is based on payment history, you obtain credit faster than you would for your personal score. Make payments on time or early to positively impact your business credit score.
Establishing and monitoring healthy business credit opens the doors for new opportunities and growth. You’ll be able to access more funding sources, and often with better rates.