Setting up a business can be a time-consuming and costly process. The financial aspects of starting a business venture can often be the most stress-inducing and difficult part.
Many potential business owners put off starting their business because of a multitude of reasons related to finance.
While a business line of credit can really help to get a business off the ground, business owners often aren’t sure how to go about securing a business line of credit or whether they even should.
Furthermore, the difference between a business line of credit and a personal line of credit can sometimes be confusing, especially since one is liable to impact the other during the process of credit inquiries.
With that being said, there are steps that you can take to separate your personal line of credit from your business line of credit.
This will help to prevent your business line of credit from impacting your personal credit score during checks and inquiries.
Read on to find out what the difference is between personal and business lines of credit, as well as how the two lines of credit interact with one another.
What is the Difference Between a Business and Personal Line of Credit?
First and foremost, before you set up a line of credit for your business, you will need to understand how your business line of credit will differ from your personal credit line.
Although they work in the same way, they have different applications and are set up for different purposes.
A personal line of credit is something that you can set up to cover your personal expenses. Your line of credit consists of a limited sum of money that you can take out over a set period of time.
If you don’t use all of the available sum, you don’t have to pay it all back, and you don’t have to pay interest on the entire sum.
In essence, a personal line of credit provides you with a safety net that you can dip into as required to cover expenses as they arise.
You can use your personal line of credit for a multitude of different payments, from repaying your student loans to home improvement projects.
Basically, anything that comes under the subheading of personal expenses, you can use your personal line of credit for.
We should note at this point that you can also use your personal line of credit to cover business expenses.
However, we wouldn’t recommend this because it entails mixing your personal and business assets. For reasons that we’ll get into shortly, this is rarely a good idea.
With a business line of credit, the premise is much the same. You receive access to a sum of money, as determined between yourself and your lender, which you can use over the agreed period of time as needed.
You are only required to pay interest on the amount of the sum that you put towards the business expenses.
Ultimately, the only real difference between a personal and business line of credit is how you are permitted to use it.
Although you could, in theory, use your personal line of credit to cover your business expenses, you cannot use your business line of credit to fund personal expenses.
A business line of credit can be used to cover expenses related to your business venture. For example, you could use your business line of credit to pay employees, purchase supplies, or extend your inventory.
However, a business line of credit cannot be used to fund personal expenses.
So, for example, while you could use your personal credit to pay your business employees (again, we don’t recommend doing this), you would not be able to use your business line of credit to repaint your conservatory.
If your lender is made aware that you have used your business line of credit to cover personal expenses, your account could potentially be closed or reclassified as a personal line of credit.
Is a Business Line of Credit the Same as a Business Loan?
Business loans and business lines of credit are similar in the sense that they are both designed to cover the financial needs of businesses.
However, it’s important to note that business lines of credit and business loans are not the same thing.
While a business loan comes in the form of a lump sum payment, all of which you will be required to pay interest on and repay by the end of the loan period, a business line of credit only requires you to repay or pay interest on the amount that you have actively borrowed from the line of credit.
How Do I Get a Business Line of Credit?
If you want to set up a business line of credit to cover your business finances, you will need to put in an application.
As part of your application, you will need to provide evidence of how long your business has been in operation and how much annual income your business makes.
Usually, your business will need to have been registered for a minimum of six months and will have to have accrued at least $25,000 in annual revenue.
Your lender will also look into your credit score. Some lenders do not have a set minimum credit score to qualify borrowers for a business line of credit, but the majority will require a credit score of 500 or more.
Does a Business Line of Credit Affect Personal Credit?
When you apply for a business line of credit, your lender will carry out inquiries into your personal credit.
Any inquiry of this kind into your personal credit has the potential to dock a few points from your credit score.
Usually, however, the impact shouldn’t be too significant and will most often not be enough to impact your ability to take out a business line of credit, as long as your score is high enough, to begin with.
Points may also be subtracted from your personal credit score in the event of any subsequent applications for business credit cards or other loans for your business.
Ultimately, though, the extent to which your business line of credit will affect your personal line of credit depends on your lender or issuer and on what information they report to credit bureaus.
The more information your business credit lender reports to consumer credit bureaus, the more likely it is that your personal credit line will be impacted by your business line of credit.
Separating Personal Lines of Credit from Business Lines of Credit
In order to minimize the impact that your business line of credit may have on your personal line of credit and vice versa, it’s important to keep your personal and business lines of credit as separate as possible.
The best and easiest way to do this is to keep your business spending confined to your business line of credit and to use your personal line of credit only for personal expenses.
This will minimize the extent to which your business and personal assets are mixed, which helps to keep one score from impacting the other too significantly.
Even though it can be tempting to use your personal credit for business expenses at times since the regulations surrounding personal lines of credit permit this kind of use, we would strongly recommend not doing so if you want to keep your personal line of credit unblemished by business finances and avoid being accused of dodging your taxes.
Getting a separate bank account for business revenue and transactions can also help to keep your lines of credit separate.
A business line of credit can have an impact on your personal line of credit.
However, if you keep your business and personal spending separate (which involves not using your business credit card for personal expenses and vice versa), your business credit should not significantly impact your personal credit score.
With that being said, you can expect to see your personal credit score diminish slightly as inquiries are carried out into your credit history when you apply for a business line of credit.
You may also see a few points being deducted with each new application for business credit cards or additional business loans.
To avoid too much interaction between your personal and business credit line scores, you should keep your personal line of credit for personal expenses only and set up a separate bank account for your business.