Gina recently posted this question on the Credit.com CreditExperts Facebook page:
Are there laws in place to stop a business account from being reported on my personal credit? If so how do I go about getting it off my credit?
This is an important question because many businesses rely heavily on their personal credit scores to obtain financing, especially in the early years before they have established strong business credit ratings.
There are no laws that specifically prohibit information about business loans on personal credit reports. Anytime an owner personally guarantees a business loan, there is a possibility that the loan could show up on his or her consumer credit reports. As standard practice, however, loans obtained strictly for business purposes don’t appear on consumer credit reports, with a couple of notable exceptions:
If, as a business owner, you personally guarantee a business loan and you default, then the lender will often report the default on your personal credit reports. Most small business credit cards, for example, require a personal guarantee and will report a default on the owner’s credit reports.
Capital One has been reporting most small business loans on owners’ personal credit reports in 2009. Even if the bills are paid on time, debt carried for the business result in lower credit scores.
There are a couple of other ways that business debt can affect your personal credit:
1. If you use personal credit cards to fund your business, that debt and payment history will impact your credit scores. It may help them or hurt them, depending on the information reported and other information in your reports.
2. Tapping a home equity line of credit to fund your business will affect your scores. Again, the impact could be positive or negative.
How to Keep Business Debt Off Personal Credit Reports
Set up a proper business structure, which can include an LLC, S Corp. or C Corp. “As a sole proprietor, your business and personal credit will be one and the same,” says attorney Garrett Sutton, author of Own Your Own Corporation and founder of CorporateDirect.com.
Get a business credit card that does not report routine activity to consumer credit reporting agencies, then pay the bills on time. (Virtually all major small business cards will report if you default on the card.)
When in doubt, ask before you apply. Ask the lender whether it will check your personal credit reports for a business loan or payment plan (those inquiries affect your scores), and also ask about its policy for reporting those loans.
Consider alternatives. Before you tap your home equity line or personal credit cards to launch your venture, talk with a tax or financial advisor about alternatives such as a loan against your 401(k) or other retirement plans. (You cannot borrow against an IRA.) These loans don’t show up on consumer credit reports.
Image: SqueakyMarmot, via Flickr.com