What is business credit?

Business credit reflects how well a company can qualify for and obtain funding through borrowing based on its financial history and creditworthiness. Lenders and suppliers use business credit scores to determine the risk of extending credit or loans to a business. 

Strong business credit can help secure better loan terms, increase cash flow, and establish vendor relationships.

For example, suppose you own a small retail business and want to expand by purchasing inventory from a new supplier. With a solid business credit score, the supplier may offer you payment terms that will allow you, as a borrower, to delay payment for 30 days. Without good business credit, you might be required to pay upfront.

Business credit vs. personal credit

While both personal and business credit affects your financial life, they serve different purposes and are evaluated differently. 

Personal credit is tied to your individual creditworthiness, whereas business credit is linked to your company's financial health.

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Business credit card vs. corporate card

Business credit cards and corporate cards cater to companies but differ in various ways, such as:

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So, how do you decide which card to use and when? For starters, you can use a corporate card when your employer provides it for business expenses, such as travel, client meetings, or office supplies. On the other hand, you can use a business card when you're a business owner, running a sole proprietorship, or a freelancer looking to separate personal and business expenses. 

How business credit cards impact personal credit

When you apply for and use a business credit card, the effects on your personal credit can vary based on factors such as how your credit card issuer reports to business credit bureaus. 

Here's a breakdown of the key elements that may impact your personal credit.

New inquiries

When you apply for a business credit card, the issuer often performs a hard inquiry (a check on your personal credit history). This can cause a minor drop in your personal credit score, but the effect is typically temporary and fades after a year. However, this inquiry can stay on your credit report for up to two years.

Credit utilization

Credit utilization refers to the percentage of your available credit limit that you use. If your business card issuer reports your business credit card’s usage to personal credit bureaus, high spending on that card could increase your personal credit utilization ratio. It’s a good idea to keep your credit usage below 30% to maintain a healthy credit score.

Payment histories

Your payment history is a major factor in your credit score. Some business credit card issuers report only negative information to personal credit bureaus, like late payments. 

Therefore, consistently making on-time payments will help you maintain your personal credit score.

Pros and cons of business credit cards

If you’re a founder of a small startup or a growing business, applying for a business credit card can provide many benefits, such as:

• It can make tax filing easier and protect your personal savings from business liabilities.
• It can be useful when you apply for small business loans or other types of financing.
• It can give you access to working capital to cover daily expenses and grow your business without needing traditional loans.
• It might offer rewards like cash back, points, or discounts, which you can reinvest into your business.

That being said, you should also know that there are some cons to getting a business card as well. These include:

• Most business credit cards require a personal guarantee, meaning you are personally responsible for any unpaid balances.
• If you carry a balance, business credit cards may have higher interest rates compared to personal cards.

How to build credit with business credit cards

Using a business credit card effectively can help you build a strong business credit history. This can be valuable when applying for loans or other types of financing down the road. 

Here are some tips that you can implement to build credit while maintaining control over your spending:

• Set up clear accountability: Establish a system for tracking expenses by requiring receipts for every transaction and pre-approving all spending. This will help you keep a check on unauthorized or unnecessary charges to maintain financial control.

• Decide who gets a card: Limit the number of employees who have access to a business credit card based on their role in the company. This will help you avoid overspending and misuse.

• Set spending limits: Restrict specific purchases like meals above a particular spending limit as needed. Make sure all employees are aware of these policies by providing written guidelines and requiring signatures for accountability.

• Monitor activity regularly: Use card activity alerts to stay informed of transactions, especially those that are unapproved. Regularly review statements to verify all charges are authorized, and use online banking tools to track transactions in real-time for better control.

• Use credit responsibly: Credit card interest rates tend to be higher than loans, so it's often better to secure financing through a bank for large expenditures. Only use the credit card when it makes financial sense, and steer clear of accumulating debt.

Do corporate credit cards affect personal credit?

Corporate credit cards are issued by companies for employee business expenses, and in most cases, they don’t directly affect your personal credit. However, there are a few exceptions where your personal credit may be impacted, depending on how the card is issued and managed.

Some of these cases are:

• Credit checks during issuance: When your employer issues you a corporate card, the card provider may run a credit check to assess your credit history. This can result in a small and temporary decrease in your personal credit score. However, this is usually the only impact on your personal credit.

• If you are an authorized user: If your employer adds you as an authorized user on a company credit card, the issuer may report the card activity to the consumer credit bureaus. In this case, the cardholder’s payment behavior can affect your credit score, whether it’s positive or negative.

• Employer payment responsibility: Since corporate cards are backed by the company, you’re generally not personally responsible for paying the bill. Therefore, the account activity won’t appear on your personal credit report unless you are specifically named as the cardholder and the company defaults on payments.

How business structure affects personal credit

Different structures can either shield your personal credit from business debts or expose it to potential risks. Here’s a breakdown of how various business structures affect personal credit.

LLC

With an Limited Liability Company (LLC) , only the company's business credit report will be affected by the repayment of debts. If the LLC has debts in its name, your personal credit will remain intact unless you personally cosign or guarantee those loans. 

This separation helps protect your personal assets, making sure that your credit is not directly impacted by business liabilities.

S Corp

An S Corporation keeps your personal credit separate from business debts, providing liability protection for shareholders. However, lenders might still check your personal credit if you apply for loans or if you personally guarantee any debts.

C Corp

C Corporations operate as separate legal entities, which means that shareholders are not personally accountable for business debts. Your personal credit is generally safe from the company’s financial activities. 

However, just like with S Corps, lenders may require personal credit checks if you guarantee a loan, making it essential to be cautious about any personal commitments.

Sole Proprietor

A sole proprietor business structure does not provide a legal distinction between you and your business. Any debts incurred by the business will directly affect your personal credit score. If the business cannot repay its debts, your personal assets are at risk, and creditors can pursue you for repayment.

FAQs about business credit and personal credit

Does a business credit line affect my personal credit score?

A business credit line can impact your personal credit score if the issuer reports your business credit card activity to consumer credit reporting agencies. If a personal guarantee is required and the business fails to meet its financial obligations, the owner's personal credit score will also suffer due to unpaid debts.

Do business loans help build personal credit?

While applying for a business loan may initially affect your personal credit score due to a credit check, its long-term impact largely depends on how the loan is managed. Generally, business loans do not contribute to building personal credit, but if a personal guarantee is involved, late payments could negatively affect personal credit reports.

Do business loans show on credit reports?

When a personal guarantee is in place, negative business loan activity—like defaults or late payments—may show up on an individual's credit report. Otherwise, business loans do not appear on personal credit reports because they are treated as separate financial commitments.

Does debt from an LLC count as personal debt?

Debt incurred by an LLC does not usually count as personal debt, as the structure protects personal assets from business liabilities. However, if the business owner personally guaranteed the loan, then that debt may be considered personal and could have a negative impact on their personal credit.

Conclusion: Get started with Rho today

Understanding how business credit can affect your personal credit is essential for protecting your financial health. When you manage your business credit wisely, you can build your business credit profile without impacting your personal credit score.

Using Rho Corporate Credit Cards offers you an effective way to control spending. With Rho, you won’t face a hard inquiry when you apply. Instead, you can benefit from features like spend limits and automated accounting that help you maintain compliance.

Apply now to start enjoying the benefits of Rho Corporate Credit Cards today.

Pia Mikhael is a guest contributor. The views expressed are theirs and do not necessarily reflect the views of Rho.

Any third-party links are provided for informational purposes only. The third-party sites and content are not endorsed or controlled by Rho. Rho is a fintech company, not a bank. Checking and card services provided by Webster Bank, N.A., member FDIC; savings account services provided by American Deposit Management, LLC, and its partner banks.

Note: This content is for informational purposes only. It doesn't necessarily reflect the views of Rho and should not be construed as legal, tax, benefits, financial, accounting, or other advice. If you need specific advice for your business, please consult with an expert, as rules and regulations change regularly.

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