Personal credit is often referred to as consumer credit. According to www.investopedia.com, “Consumer credit is basically the amount of credit used by consumers to purchase non-investment goods or services that are consumed and whose value depreciates quickly. This includes automobiles, recreational vehicles (RVs), education, boat and trailer loans but excludes debts taken out to purchase real estate or margin on investment accounts. For example, a mortgage for purchasing a house is not consumer credit. However, the 52 inch television you put on your credit card is.”

By comparison, then, business credit, which is also referred to as trade credit or commercial credit is the amount of credit used by businesses in transactions with vendors and investors and can range from a few hundred dollars to millions of dollars. By its very nature, business credit is far more complex than personal or consumer credit. And the pitfalls along the way toward building business credit are many. This is why it is imperative that a business begin building its business credit immediately and correctly.

One way that many small business owners get started is by using their personal assets and credit. While this may be an effective strategy in the beginning, it will quickly become evident that personal and business credit need to be kept separate. One main reason for doing so is that your business might end up hurting your personal credit. Here’s how:

• If you use your social security number, your personal credit will be affected

  Every time you use your social security number to apply for business credit, even if it’s only for a couple of hundred dollars at your local office supply store, there is an inquiry into your personal credit history. If there are too many inquiries within a short period of time, your personal credit score will drop, so the bottom line is that more inquiries mean a lower credit score. Typically when building business credit, there can be as many as twenty or more inquires per month, which can dramatically and negatively affect personal credit.

• Cash advances
  

  If you use your personal credit cards for cash advances to pay for business expenses or to improve cash flow, your personal credit score might drop, especially if you don’t pay off the cash advance right away. The key is that if the cash advance is reported, it most likely will negatively affect your personal credit rating.

• Use personal credit cards for business expenses

  It might be tempting to use your personal credit cards to pay for those unexpected business expenses that always seem to just crop up at the absolute worst time. If at all possible, however, you want to avoid the temptation since doing so can negatively affect your credit score by increasing the amount of your liability, which in turn can lower your credit score.

• Declined credit

  This is a big one. If you are declined for personal credit, especially more than once, your overall credit score will be negatively affected. And, like it or not, the statistics are not in your favor. The majority of loans for businesses are declined because of poor preparation.

Despite the above hazards of using your personal credit for your business, there are times when you still might find it necessary to use your personal credit. In truth, it is not always possible to keep business and personal credit one hundred percent separated, though you do want to limit your personal liability as much as possible.

If for some reason you do choose or need to use your personal guarantee in order to get a business loan, there are a couple of main points to remember.

• Keep Your FICO Score High

  You probably already know that the higher your FICO score, the better. A higher score translates to lower interest rates. When it comes to using your personal credit for business, a higher score can mean the difference in whether or not you get the loan. Most lenders will not approve your business loan if your personal FICO score is below 680.

• Keep Loan to Value Ratio (LTV) Low

  When using personal assets to secure a business loan, you need to keep in mind that most creditors want at least an 80% loan to value ratio (LTV.) This means that in order to get an $80,000 loan, your assets must be at least worth $100,000. This is similar to home mortgage loans that require 20% down.

• Be Wary of Declined Credit

  As we have already discussed above, declined credit can mean a lowered personal credit score, which in itself is bad enough. Even worse, however, is how it can eventually affect your business credit once you try to establish it. If, while using your personal credit to secure business loans, you have accumulated too many declined business credit applications, not only will your personal credit suffer, but more than likely you will have permanently damaged your business credit. To undo this damage may be impossible without completely restructuring your business.

• Avoid Personal Bankruptcy

  If you have filed for personal bankruptcy within the past seven years, creditors will be cautious, at best, before approving your business loan, and more than likely your application will be declined. And as we have seen above, declined applications mean the death of business credit.