Personal Credit And Business Credit Are Two Totally Different Things.
Personal credit is monitored for risk assessment and reported through your FICO score, whereas, your business credit is reflected by your PAYDEX score. Dun & Bradstreet now own PAYDEX, so it’s now D&B PAYDEX. Even though you may have a sole proprietorship, your business credit still does not have anything to do with your FICO score. In case you are curious, FICO is the abbreviation for; Fair, Isaac, and Company.
The Personal Guarantee
Your lender may require a personal guarantee from you as a condition of the business loan. This is especially true if your business is new. Think of this as co-signing on a loan for another person. It does carry some risk exposure. All is fine… unless your business fails and you default on the loan, then your personal assets could be taken or other actions such as leans placed against your home or other holdings. Just like the distant cousin who defaulted on his loan, and left Grandma standing for the debt, the lender would go to the co-signer to satisfy the debt of your business loan – which would be you.
So, just as the name implies, a ‘personal guarantee’ means you are personally responsible if the business loan goes into default. So you might be thinking, “wait, how can business credit have nothing to do with my FICO if I’m co-signing for my business loan?” Just remember the two credit reporting agencies are separate. If you default on a business loan, they might take your boat, the equity in your house, or your beach house to recoup their losses, but they won’t report the defaulted business loan on your FICO. Your FICO won’t show anything happened, even though you lost all your equity in your home and toys. There’s still no free lunch, not even with business credit. If you default, you will personally feel the pain financially, your business PayDex score will for sure take a beating, but your FICO will be untouched by the storm.
The Biggest Differences Between Business Credit and Personal Credit
Business credit is easier and faster to achieve IF done correctly, and building business credit is done very differently than personal credit. Regardless of what kind of advice is offered on the internet, if it were all that easy every business owner would have stellar business credit. Rather, most business owners have never even investigated to see all the advantages that business credit offers. This is one of the main reasons businesses fail in the first five years; owners deplete their personal resources and the doors must close.
Reasons for Business Credit
There are many reasons why businesses need and want credit. First and foremost it will stop your personal wallet from being the ATM for your business. All businesses need to be independent, without the co-mingling of funds. It not only makes your record and bookkeeping easier it prevents your personal credit utilization from climbing into the stratosphere, prevents you from paying higher interest rates from high utilization, makes your personal finances easier to manage when times are lean and your business profits are down. In short, having business credit helps keep your personal finances out of harm’s way.
Advantages of Having Business Credit
Is cash flow important to your business? Only about as important as your heart pumping in your chest. How do you keep your business alive when the cash flow stops or slows down to a trickle? Well, you might need a transfusion of cash to buy a piece of equipment or make a critical repair. That isn’t even an option if you don’t have any credit to leverage. With no other options, you’re about to become high-interest prey for a lender because now, with no established business credit, you are out of choices. That is, IF you can get a loan; with your business on the rocks and your personal credit being leveraged out. It’s much smarter to have the credit established and accessible – before you need it. A line of credit is great for that financial “rainy day”, which sooner or later probably will happen.
What about having the funds to take advantage of a sweetheart deal that could make or break your business future? Maybe you do have a nice business savings account, but wouldn’t it be better to use other people’s money rather than your business’s nest egg? As luck might have it, just as sure as you decide to go ahead and use your savings for that needed upgrade, something really expensive breaks. Now Murphy’s Law just caught you with your shorts down.
The points noted above are just some of the reasons why businesses need their own credit separate from the owners’ credit. There are many, many other strong reasons.
In short, business credit stabilizes businesses and therefore adds greatly to the longevity of the business.
You can’t utilize an option that you haven’t already established. It takes time and strategy to have business credit that is a strong, viable resource for your business. Is it worth it? How much of a gambler are you? Are you really feeling that lucky?
Melissa Waters TTWAU Brand Ambassador