What is the difference between business credit and personal credit?

Credit is the fastest way to grow your business, but as the owner of an SMB it can be difficult to separate business from personal credit. Knowing the difference can help you to protect your personal credit score and maximise the potential of your business credit rating.

The important thing to realise is that business and personal credit are not the same. So even if it is just you in your business, you’ll need to curate your personal and business scores in very different ways. Manage it successfully and you’ll get the most preferential loan rates and financial products that can fuel your business growth.

What’s the difference between personal and business credit?

There are two essential differences between business and personal credit:

A personal credit score is available as a single number whereas business credit is available in a series of reports. However, it can be easier to improve a business credit score as they contain fewer variables; your industry, the debt you’ve accrued and the way you pay your bills.

In the UK, separate files are established for you as a consumer and as a business. The principal consumer credit agencies are Experian, Equifax, and Callcredit. For businesses Dun and Bradstreet, Graydon, and Credit Safe will all hold files which may contain slightly different information and be scored in different ways.

Compared to personal credit, there are far fewer protections for businesses. Where an individual can successfully challenge any inaccuracies in their credit report, it’s far tougher for your business. 

Why is business credit important?

You may need some form of financing in order to grow your business. However, getting the best loan rates and credit card deals depends on a score generated by the Credit Reference Agency which is calculated on payment reliability and past defaults. 

A strong credit score can help you to get better deals and offers from lenders. It is also an asset when negotiating contracts and competing for business. Knowing what your credit score means and keeping it healthy helps you maintain credit control and good cash flow. 

The personal credit trap

Many SMB owners start by relying heavily on their personal credit. When you first start applying for loans and business credit, a lender may access your personal credit score if they have no other information to go on. That’s why it pays to start establishing business credit as quickly as possible.

Use your personal credit and you expose yourself and your family if the business fails. By using personal credit, you deny the business the opportunity to start building its own credit profile. Moreover, your personal credit rating can be significantly adversely impacted by making a series of business-related queries.

If you want to grow your SMB fast and project a professional image, you need to start improving your business credit score.

Improving your business credit score

There’s no magic formula for improving the credit score of your firm but there are some easy wins when it comes to establishing and growing business credit.

Establish the right structure

If you want to separate personal and business credit from the outset, opt to form a partnership or a limited company. You’ll automatically create a financial identity and protect your personal credit score.

Set up a business account

Even if you prefer to remain a sole trader, it makes sense to open a business account separately. This allows you to start building your business credit score as soon as you start trading and makes it easier to deal with accounts and expenses.

Get a business credit card

The sooner you start creating a credit history the better. A company credit card can make tracking expenses easier and is a useful tool to establish a repayment history. Be careful to limit your searches when you start trading as these can negatively impact your credit score – ask for quotes instead. 

Share up to date information

Ensure your business information is kept as up to date as possible and share any changes immediately with credit reference agencies (CRAs), banks and customers. The more reliable your information, the lower the risk you represent.

Pay promptly

Whether that’s a credit card bill or invoices, pay as soon as possible to improve your business credit score. You should also aim to file your taxes in a timely fashion and avoid any CCJs or pay them down as soon as possible. Any actions that indicate financial problems will negatively impact your business credit rating.

Check your rating

It makes sense to keep checking your own credit reports for any inaccuracies so that you can address them as quickly as possible. Set alerts when your rating is searched or changes so that you can address any problems fast.

Establish business-to-business credit

Buying office furniture or stationery on an agreed credit basis is the fast way to start establishing business credit. Repay in full and on time and your business will establish a good reputation with CRAs.

The benefits of business credit

Obtaining financing and building a business credit score can be challenging. However, if you want to protect your personal credit while getting the best deal for your business, it pays to focus on this area as soon as possible.

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