Personal Credit vs. Business Credit: The Key Differences and How to Manage Them
If you’re a small business owner or aspiring entrepreneur, you’ve probably heard that “credit is everything.” Whether you need funding to buy equipment, stock inventory, or expand into a new location, your creditworthiness can determine if you secure a loan — and at what rate. But the lines between personal credit and business credit can get blurred, leaving many new entrepreneurs unsure of how to manage each. To help demystify this topic, we interviewed Kim Kersten, a retired Senior Vice President & Director of Business Banking for Comerica Bank who serves on Michigan Women Forward’s board and loan committee.
Below, we break down some of Kersten’s insights into personal versus business credit and why it’s crucial to manage both effectively.
1. Defining the Different Types of Credit
Personal credit is tied to the individual. It reflects your personal borrowing and repayment habits based on factors such as credit card usage, mortgage payments, and other personal loans. Business credit, however, revolves around your company’s financial behavior, focusing on factors like timely payments to vendors, outstanding business loans, and the overall health of your business accounts. While lenders may examine both when considering a business loan, the two are ideally maintained and reported separately.
“One of the biggest misconceptions I often see is that entrepreneurs believe they can handle their business finances differently from their personal finances even if their personal credit isn’t strong,” Kersten says. “If you can get your finances in order personally, it will increase your odds of obtaining the credit you need for your business.”
Personal credit relies on your Social Security number and personal credit history, whereas business credit typically uses an Employer Identification Number (EIN) or other business identifiers, along with specialized business credit bureaus like Dun & Bradstreet. This separation is crucial because it shields your personal finances from risks associated with your business and helps build a clear credit profile for the company itself.
Before you establish business credit, lenders rely on your personal credit, or FICO score, when determining your creditworthiness and your interest rate. “As a general rule, I’d say that a credit score above 700 is OK,” Kersten says. “Ideally at least the mid-700s.”
However, Kersten says that those who have credit scores below 700 may still be able to obtain a business loan. For one, organizations like Michigan Women Forward — a CDFI lender — help Michigan entrepreneurs obtain loans up to $50,000 when traditional lending may not be an options. In addition, there are other factors that go into whether an individual is approved for a business loan.
2. Understanding the Five Cs of Credit
According to Kersten, both personal and business lenders often rely on the “Five Cs” of credit analysis:
- Character: This includes your personal credit history and any background checks. Lenders use tools such as credit reports and minimum credit scores to assess how reliably you meet financial obligations.“For business loans, we look at the owner’s background and require a personal financial statement. We want to see they have the expertise to run that business successfully,” Kersten says.
- Capacity: Your ability to pay back the loan. This involves debt-to-income (DTI) ratios for personal credit and cash flow coverage for business loans. “For business lending, we ask: Does the company have enough cash flow to service the debt?” Kersten says. “We want to see that consistent capacity.”
- Capital: Skin in the game. How much of your own money are you putting into the venture? On the personal side, think of a mortgage down payment. For business loans, lenders often finance only a percentage of inventory, accounts receivable, or equipment.
“Traditional lenders don’t want to fully fund a business if the owner doesn’t have something invested,” Kersten notes. “That equity is vital to show commitment.” - Collateral: Assets that secure the loan. For a personal loan, it could be your home or car. For businesses, it’s equipment, real estate, inventory, or accounts receivable. “If we have to liquidate, the bank needs to ensure it will recover some of the loan investment from the collateral,” says Kersten.
- Conditions: The wider context — industry climate, economic outlook, and how you plan to use the funds. “This is where we assess whether the business can remain profitable through economic cycles or disruptions,” Kersten explains.
3. Keeping Personal and Business Finances Separate
“If you’re a sole proprietor, it might feel natural to combine personal and business expenses, but that can get messy fast,” Kersten warns.
Open separate checking accounts, one for personal use and another for business transactions. Not only does this simplify bookkeeping, but it also helps build a distinct financial identity for your business. This segregation can protect your personal assets if issues arise and demonstrate professionalism to lenders.
4. Establishing Business Credit Early
Building business credit involves more than just your personal credit score, though your personal score still matters. Applying for a business credit card or setting up vendor lines of credit can help.
- Vendor Lines: Work with suppliers who report on-time payments to business credit bureaus such as Dun & Bradstreet.
- Business Credit Cards: Responsible use of a card in your company’s name will also help establish a credit history.
“Get that bank account open as soon as you start the business,” Kersten says. “And if you can secure a modest line of credit with a vendor, pay it back on time. It’s a great way to build your business credit profile.”
5. Growing at a Sustainable Pace
While rapid growth can be exciting, it can also strain your finances. Taking on bigger projects, staffing up too quickly, or purchasing too much inventory may overload your cash flow and raise red flags for lenders.
“Bigger isn’t always better,” Kersten cautions. “I’ve seen businesses collapse under the weight of too-rapid expansion. Sometimes slow, controlled growth is the key to long-term success.”
6. Maintaining Strong Cash Flow and Capital Reserves
Cash flow is the lifeblood of any business. If you withdraw too much money personally or don’t leave enough capital in the business, you may struggle to cover operational costs or loan payments when market conditions shift. Kersten emphasizes the importance of maintaining a healthy balance. “Let the company remain well-capitalized so it can weather a storm. If you can afford not to pay yourself right away, don’t — particularly in those early years.”
7. Protecting Yourself (and Your Business) Against Fraud
From phishing emails to AI-generated voice scams, fraud can strike unsuspecting entrepreneurs and employees.
“The fraudsters are getting very sophisticated,” Kersten notes. “They can disguise emails or phone calls so well that employees unknowingly send them money. Always verify requests before moving any funds.”
Implement safeguards: require dual authorization for large payments, use secure accounting software, and train your team to recognize suspicious activity.
Final Thoughts
When starting or growing a small business, understanding the interplay between personal credit and business credit is essential. Solid personal credit gives you a head start in accessing business loans while establishing separate business credit ensures the company can stand on its own. By setting up a dedicated business bank account, applying best practices with vendors, and adhering to the Five Cs of credit, you lay a strong foundation for long-term financial health.
“Ultimately, lenders view your personal habits as an extension of how you’ll manage your company’s finances,” Kersten says. “Pay attention to both, and you’ll be in a much better position to secure the funding you need.”
Remember, Michigan Women Forward is here to support Michigan entrepreneurs and small business owners on their journey to financial empowerment. By focusing on both personal and business credit management, you can build a stable, thriving enterprise that stands the test of time.
