You may be surprised if you apply for a business loan and the bank wants to check your personal credit score. After all, best business practices suggest that you need to completely separate your personal finances from your business’s finances.
For instance, you should have a separate business account for your business expenses. This account should not be used for personal expenses. You should also get a separate business credit card. Consider setting up a legal structure for your business which is separate, such as a Limited Liability Company. This will help protect your personal assets from business liabilities.
Given this focus on keeping business and personal finances separate, why do banks care about your personal credit?
If your business has a limited credit history, then banks may require a personal guarantee in order to give your business a loan. If you have decided to give a personal guarantee in order to secure a business loan, the approval and terms of the loan depend on your personal credit score.
Giving a personal guarantee is roughly equivalent to you personally cosigning your business loan. It means that if the business is unable to repay the loan, then the bank can go after your personal assets. A personal guarantee is a serious obligation, and you should consider carefully whether you are willing to bring your business risks into your personal life.
So in some cases you will need to improve your personal credit score to not miss out on the best credit opportunities for your business. Here are some of the ways you can improve your personal credit scores:
Note that your personal credit score is tied to your social security number, and personal financial history. On the other hand, your business credit score is tied to an EIN - or Employment Identification Number, and your business’s financial history.
Warning! If you take out a personal loan but then use the funds for your business, that loan will be tied to your personal credit score and history. Ideally, you should take out loans that will be used for your business using an EIN so that it connects to your business credit history. This is in order to keep business and personal finances separate, and also so that your business can start building its own credit profile.
Since both personal and business credit scores are important when it comes to SMBs, Scorico provides the tools that you need in order to boost both of them in the same easy-to-use platform. Sign up to be a beta tester for Scorico today. The first 1000 beta testers will have free access to all beta features for life!