Keeping personal and business credit separate

Dear RCH,

The key is to not use your personal credit to finance your business purchases.

For example, it is not uncommon for small business owners to secure business loans using their personal credit, or to use personal credit cards to purchase office supplies or equipment. Doing either one typically results in those financial obligations being reported in your personal credit history.

To completely separate the two, you must establish your business as a legal entity that does not hold you personally liable for the debts of the business. There are number of ways to incorporate or structure a small business. I’m not an expert in that area, so suggest you consult with your attorney or perhaps a state or local government office where you live for advice in that regard.

As your business applies for and receives credit, a business credit report will be established. That report will then act as the primary tool for determining whether or not you are approved for business credit.

If you are personally liable for any debts such as in a sole proprietorship, it is not uncommon for potential creditors to check both your personal credit report and your business credit report.  That is because there is a proven, strong correlation between the personal credit histories of small business owners to the business credit performance, particularly in the early years of the business.

Studies have shown that if small business owners begin to have problems with their personal credit, it often quickly translates to problems with their business credit.

For that reason, lenders may review your personal credit as well as your business credit when you apply for business purposes. This is especially true if you are using your personal credit as security for the business loan.

Thanks for asking.