The Entrepreneur’s Lifeline: Using Business Credit to Protect Your Personal Credit | Credit Cards
Key Takeaways
- Relying on personal credit cards for business expenses can negatively impact your FICO score by increasing your credit utilization ratio or leading to late payments during slow business months.
- You may want to create a legal distinction between yourself and your business.
- Building a separate business credit profile allows you to access broader funding options and enables you to choose credit cards with features tailored to your business needs.
Sales fluctuate, but expenses may not. Cash flow gaps can lead business owners to swipe personal credit cards for inventory, advertising or equipment. And while this may solve the issue in the short term, it can create long-term headaches.
Hidden Risks of Using Personal Credit for Business Expenses
Using a personal credit card to cover business expenses when cash flow is tight can seem like the easiest and best solution. It’s much easier to reach into your wallet for a card that’s already there instead of applying for new financing or waiting for customer payments to come through.
But while this strategy can provide short-term flexibility, it can lead to long-term complications.
Your Personal Credit Score Could Take a Hit
One of the biggest risks is the potential impact on your personal credit score.
If you have a newer business that has no established credit history, lenders might rely more heavily on your personal credit to determine financial risk. And if business expenses are what cause your balances to climb, your personal credit utilization ratio will go up, which will lower your credit score since it accounts for 30% of your FICO score.
Missed or late payments are also a possibility if your business experiences a slow month, for example. Payment history accounts for 35% of your FICO score, and one bad month could have lasting effects.
Limited Access to Business Capital
If you only use personal credit, you’re limiting your own funding options. Some lenders only focus exclusively on business credit scores and cash flow, which can limit your access to capital.
Business credit also allows you to qualify for business loans like business installment loans, business lines of credit and Small Business Administration loans, and your chances of approval for an SBA loan increase after you’ve established a lengthy and positive credit history.
You Could Be Personally Responsible for Business Debt
Business credit can help you set up a barrier between your personal assets and your business debts.
If you legally establish your business in the form of a limited liability company or a C corporation, you may be able to receive business loans without a personal guarantee. Doing so can mean that if your business can’t repay its debt, creditors can’t pursue your personal assets.
How to Build Business Credit
Business credit can improve your chances of approval for numerous financial products and help to legitimize your business. Here’s how to quickly build business credit:
- Register your business. To ensure a clear separation between personal and business credit, it’s best to create a business that’s legally distinct from you. You can register as an LLC or corporation, but what’s best suited for you will depend on several factors, like taxes and business goals.
- Apply for an employer identification number, or EIN. An EIN is like a Social Security number for your business. It’s issued by the IRS, and you can apply for free directly through their website.
- Apply for a Data Universal Numbering System, or DUNS, number. A DUNS number is a unique nine-digit number assigned to your business by Dun & Bradstreet – one of the major business credit bureaus.
- Open a business bank account. Using your EIN, open a business bank account. Use this account for all of your business-related expenses and income to ensure there’s no overlap between personal and business, and this positive banking history will help with future lending opportunities as well.
- Establish trade credit with vendors. Work with vendors that report payment history to the major business credit bureaus. After building a positive payment history, you’ll be able to negotiate credit with these vendors on payment terms such as net 30 or net 60.
- Apply for a business credit card. While it’s true you can apply for a business credit card using your personal credit, that can muddle things. Make on-time payments to build up your business credit score.
- Monitor your business credit score. Regularly monitor your business credit – like you would your personal credit – with the three major business credit bureaus: Dun & Bradstreet, Equifax Business and Experian Business.
Choosing a Small Business Credit Card
Your business credit card should complement your business while encouraging good financial management. Some features to consider when choosing a business credit card include:
- Length of introductory APR offer
- Credit limits
- Rewards on common business expenses
- Employee cards (if applicable)
- Expense tracking tools
- Accounting integrations
- No or low annual fee
The type of business credit card you choose will depend on what you hope to accomplish with your business.
For instance, if your business requires you to travel or take clients out for lunches, a credit card like the U.S. Bank Business Altitude® Connect Visa Signature® Card would be a good option since it offers bonus rewards on travel purchases, gas and dining. And its $0 intro annual fee for the first year, $95 thereafter, is lower than other premium business credit cards while still offering benefits like airport lounge access.
But if your business doesn’t involve travel, you might be better off with a cash back card like the Ink Business Cash® Credit Card, which offers bonus cash back rewards at office supply stores, gas stations, restaurants, and on internet and phone services.
Categories not your thing? Then a flat-rate cash back business credit card like the Wells Fargo Signify Business Cash® Card could be your go-to since it earns 2% cash back on all purchases made for your business (and with no annual fee).
Establishing business credit, using dedicated business financial products and keeping clear boundaries between your personal and business expenses can help preserve your personal credit while giving your business more flexibility to weather uneven cash flow.
