Many people want to go into business for themselves because it offers them a concept of a better life. Whatever the reason people go into business, they might have to get credit cards or loans for their business, but herein the question lies. Does my personal credit score affect my business? The answer to this question is; yes and no, and it depends as it can be complicated.
The good news is we will be going into this subject more thoroughly, so you have the answer to your questions.
What Type of Business Entity Are You Starting?
Your business type that you start will depend how likely lenders will give you a credit card or a loan based upon your business needs. Here are the common business entity types and how they affect your credit score.
- Sole Proprietorships
Sole proprietorship means you are running the business, but have not registered your business as its own legal entity within your state you live. So in a sense your business operates under your name, and your social security with your credit score.
Lenders won't look at your business finances separate from your own. You will want to have good credit of your own, as if you do need a loan, lenders will consider you personally liable for your business debts.
A limited liability company (LLC) is considered a "pass through entity," meaning that the business results are posted on your personal tax return with a Schedule C from the IRS. However, an LLC has its own tax id called an employer identification number (EIN) in which you can use this to apply for business credit cards and even loans.
However, just because you have an EIN for your business doesn't always mean that lenders won't ask for your own personal information and tax returns, proving proper income.
- S & C Corporations
There are two styles of corporations, the S-Corporation and the C-Corporation. The S-Corporation acts like an LLC to where it is a pass through entity, but has significant benefits to that of the C-Corporation.
When it comes to C-Corporations, they are treated as a separate entity with an EIN. They have to have their own separate tax filings, but can have their own credit cards and bank loans that are not typically associated with your personal credit score.
When it comes to corporations you can pay to get a business credit rating from Dunn & Bradstreet, Standard and Poor's, or even Moody's. You will be able to build a solid reputation from these companies, but this is typically reserved for larger older corporations.
Tips for Improving Your Personal Credit Score
- Always Make Payments on Time
35 percent of your credit score is based upon making timely payments, so make your payments on time.
- Use Your Credit Wisely
There will always be the temptation to max out your credit card, but as a reminder credit bureaus states that if you're trying to increase your credit score, you should keep your usage to only around 15 percent of your available credit line.
- Use Bill Consolidation
If you are overburden with credit card debt, bill consolidation will help you lower your debt to income ratio and raise your credit score.
Your credit score is important depending what type of business you may want to start. If you don't have the best credit, you can always try bill consolidation along with an easier approach to your business working with little to no overhead.
However, if you have a business, you would like to get started right away, and need loans and credit cards that don't rely on your own personal credit score, then you might want to aim for the C-Corporation.