Personal Credit VS. Business Credit

When many entrepreneurs are ready to launch their new corporation, they find that the only option they have to finance the starting costs is to use their own personal credit lines. The same thing may happen when growth occurs. The problem is that these business owners either have no idea how to use corporate credit, or they do not have the correct structure in place to qualify for it.

Why is using personal credit to support corporate costs a poor decision? When a business owner uses his personal credit to pay for corporates expenses, that debt shows up on his credit report. Even if he makes all of his payments on time each month for the debt, it can create a poor debt-to-income ratio, which has a negative affect on credit scores. Since business debts are typically for larger amounts than personal debts, this creates a huge strain on the individual’s credit history, and therefore the credit score.

Having corporate credit requires a business owner to establish credibility for the corporation. Lenders will not give loans to start up businesses that do not appear to be a good risk. Establishing this credibility is a good step for any corporation. Building a credit rating can be done by paying vendors on time and even purchasing corporate trade lines to provided a temporary boost to a corporate credit rating.

Business loans and lines of credit typically have a lower interest rate than those for individuals. Switching all personal credit to corporate credit for a business will save the business owner money. Not only that, but business owners are not held responsible if a business would fail if the business is built on corporate credit lines. Businesses that ride on personal credit lines are the legal responsibility of the owner. 

Corporate credit is crucial to taking a business through the times when things slow down. All businesses, no matter how much in demand they are, go through slow times. When things are slow the business owner is still responsible to pay utility bills, vendors, and sometimes employees. For this reason having the ability to pull out a business line of credit or apply for a loan may end up being the only thing that allows the business to succeed.

When personal credit is replaced with corporate credit, the result is that the business loan is reported to the business’s credit profile, not the credit profile of the individual. However, to qualify for corporate credit a business will need a Paydex score that is fairly high. A score of 80 or higher is ideal. Some lenders who lend smaller amounts may accept businesses that have lower Paydex scores, but businesses with no Paydex score will find it nearly impossible to get corporate credit.

If you are a business owner that is seeking corporate credit lines, take the time to look over your credit score and see where it could be improved. If you find that you have no Paydex score, then take some steps to establish some credit worthiness for your business. Doing so will allow you to finance business needs without relying on your personal credit score.