Is Personal Credit Important for Entrepreneurs?

Posted on August 26, 2009 by David Gass 3 Comments

For years I have written and spoke about how you can separate your personal and business credit and how to limit the use of personal guarantees and personal credit in your business. At no time however did I say that your personal credit score isn’t important.

Although you can build credit and financing for your business without using your personal credit and guarantee all the time, you still may need them on occasion to obtain financing in your business and more importantly you will need it in your personal life. So don’t ignore your personal credit score.

Here are three tips to improve your personal credit as a small business owner:

1. Build a business credit report. When you create a separate business credit profile and report for your Corporation or LLC you are essentially creating a new credit profile to obtain financing with. This is an opportunity to build credit for your business from scratch and not have your personal credit attached or affected. Again, you may need to use your personal credit from time to time to obtain the credit, but as long as the account doesn’t show up on your personal credit report it will still help protect and improve your personal credit report.

2. Limit the use of your personal credit. In building my own businesses it took me time, but I learned that everything is negotiable. When signing for office space the first five properties I looked at asked for a personal credit check and guarantee to lease the building. When I told them I didn’t want to provide that they denied my application. Finally, when I looked at the sixth property I made an effort to sit down with the property owner and told them I wasn’t interested in providing my personal credit or guarantee so what would they like in return they aren’t asking for now. They wanted a longer lease, so I agreed and signed the deal. You can limit the use of your personal credit by negotiating with the powers that be.

3. Don’t use personal credit cards that report to personal credit bureaus. I have worked with a lot of business owners who said they used one personal credit card for business purchases and only for the business so they weren’t commingling funds, just so they could get all the reward points. They didn’t see a problem because they were paying the balance off each month and weren’t collecting any interest so they were winning. The challenge in doing this is that your balance each month when it’s reported shows the outstanding amount due. Even though it will be paid off and on time the available revolving amount on the card will be very low when reported to your personal credit report. According to Fair Isaac 30% of your personal credit score is based on Amounts owed. This includes the available balance you have on your credit cards. If you’ve used all the available credit it will lower your score.

Your personal credit score is very important individually and as a small business owner so take steps to protect the score and if need be build your score. A good score these days is 720 or higher. If you don’t know what your score is you need to buy your report from a company selling credit reports. The free reports annually don’t provide a score. I would encourage you to go directly to Experian or Equifax to purchase a three-in-one report with score that shows all three credit bureaus and your FICO score.

Then I would encourage you to purchase a personal credit monitoring service. This will track any changes to your report and alert you immediately of the change.