Business owners sometimes attempt to apply for credit through their businesses, thinking that it will not affect their personal credit. Sometimes that’s true, but most times it isn’t. Here’s why…
Applying for a Business Credit Card as a Sole Proprietor
This is where it’s most difficult to separate personal credit from your business. If you are a sole proprietor, you are effectively a business. If a bank is making a loan to the business, they are really making it to you. This is also true in a closely held business, such as a partnership.
Even if you establish an employer identification number, or EIN, and attempt to apply with the EIN rather than your Social Security number, the bank will almost certainly attach the credit card to you personally.
This is especially true if there is little or no established business credit under the EIN. And even if there is, many banks still require the personal guarantee of at least one owner of a small business in order to approve the credit card.
In such situations, a hard inquiry will appear on your personal credit report. And though the bank may not report the business credit card on your personal credit report, they will report late payments or a default on the card, which they can do as a result of your personal guarantee.
Applying for a Business Credit Card as a Corporation
Your chance of separating your personal credit from a business credit card increases if you are a corporation with multiple owners. That is, as long as the business has its own EIN, has established credit in its own name, and can produce a business credit report.
However, if you are the sole owner of a corporation, or it’s closely held by just a few owners, the bank may still require a personal guarantee from one or more of the owners. The size of the business, the number of owners, and the credit history of the business will be the deciding factors.
There Are Still Advantages to an EIN and a Business Credit Card
None of this means that it is not worth it for a small business owner to have either an EIN or a business credit card. The EIN is a way for a business owner to protect his or her Social Security number, since the EIN can be provided in lieu of a Social Security number in business transactions and for payroll. It simply keeps your Social Security number from falling into the wrong hands.
And even if a business credit card appears on your personal credit, it’s still a valuable tool to separate personal and business expenses. This is particularly true when it comes time to prepare your income tax returns. It will be much easier to summarize business expenses that appear on a dedicated business credit card, than on one or more cards that also include personal use.
If you apply for an EIN and a business credit card, you will have begun the process of establishing credit for your business. As the business credit profile grows, you’ll eventually be able to use the business EIN instead of your Social Security number to apply for credit on your business – maybe even without a personal guarantee. It’ll take some time, but it will be worth the effort.