The Effect of Personal Credit on Your Business

3 types of businesses and how personal credit affects them

Business is business and personal is personal, right? When it comes to credit, the answer is not really.

Your personal credit can have a significant impact on your business and not just because it is more difficult to get a loan to make improvements or expand. Poor personal credit can make it more difficult to find vendors willing to offer you decent terms, make it more expensive to secure utilities and leases and could even prevent you from leasing space to begin with.

cash register 1507730465 1024x678 The Effect of Personal Credit on Your Business

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The impact of personal credit on your business will vary depending on what kind of business you have. If it is a sole proprietorship, your personal credit is your business credit. If you have a limited liability company (LLC) the impact is lessened but not dramatically. Corporations are the only business entities where personal credit takes a back seat to corporate credit.

1. Sole proprietorship

For all credit related matters, a sole proprietorship’s credit is personal credit. Your name is on the bills and revenues and your credit is what matters. Any loans or credit you apply for will be under your name and you are liable for paying those debts.

If you have good credit, it will be a simple matter to finance operations and run your business. However, if you have poor credit, it will be more difficult to get loans, lease manufacturing and office space and utility deposits will be higher.

2. Limited Liability Company

Although LLC’s are considered pass-through entities, which means that expenses and profits are listed on your personal tax returns, they can get their own tax ID number which can be used to establish credit and get loans based on the business’s performance. New businesses, which don’t have long-term profit and loss statements will still rely on personal credit to get started.

You should keep your personal finances separate from business finances, no matter what type of business you have. Trying to establish credit with an LLC makes it that much more important.

3. Corporation

Corporations are their own legal entities and will have their own credit rating, tax ID numbers and bank accounts. It would be very unusual to look at personal credit when getting business loans and credit lines for a corporation. The reverse, however, isn’t true. Your corporation’s credit rating would be looked at when you are applying for personal credit.

credit card 1507730527 1024x682 The Effect of Personal Credit on Your Business

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There are several distinct types of corporations and although the significance of personal credit on their operation is reduced from LLCs and sole proprietorships, in certain cases it doesn’t disappear entirely.  For example, an S-Corp is considered a pass-through entity like an LLC.

Putting it all together

Deciding which business model you want to follow will hinge on more than just your personal credit, but your personal credit can have a dramatic impact on how easily your business can run. If you have a sole proprietorship, LLC or S-Corp that relies on having good personal credit for expansion, you will need to strengthen and maintain your personal credit to keep your business successful.

It is possible to begin and run a business if you have poor credit, but one of your first goals should be to repair your personal credit and make it easier and less expensive to get loans, utilities, leases and credit cards. Credit repair can be confusing at the best of times, but trying to fix poor credit while building a business can be nearly impossible without outside help.

Jesse Fin
 

Jesse worked as a journalist for a large tv station in Korea in her past life. She now works full time at home as a blogger and loves to help her friends manage their personal budgets.

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