Consumer Credit Report vs. a Business Credit Report

Credit reports serve a purpose: to give prospective banks and lenders a picture of your creditworthiness. These credit reports allow them to assess risk and make a decision as to whether to move ahead with extending credit and at particular terms, such as interest rates. Anyone who has applied for a credit card or loan is well aware of consumer credit reports, but business credit reports also exist and contain similar information regarding outstanding loans and payments made. 

According to Investopedia, business credit reports include information different from that found in consumer credit reports, such as ownership information, subsidiaries, company finances and risk scores. A business’s credit report begins once it is incorporated and receives a federal tax ID number. Business credit reports do not contain the personal credit history of the business owner, such as loans and credit cards. Further, unlike consumer credit reports, business credit reports are public information and are available for anyone to access. Consumer credit reports can only be accessed by the individual and only those with a “permissible purpose,” such as banks and lenders.

Equifax and Experian are two credit bureaus that report both consumer and business credit. However, Dun & Bradstreet is a third bureau for business credit reporting, and TransUnion is a third bureau for consumer credit reporting.

Business Credit Reports

In order to obtain credit quickly, many small businesses rely on their personal credit history — and banks and lenders are typically more than happy to do so. However, once an incorporated or LLC business obtains a federal tax ID number, the business credit bureaus can begin tracking credit and payment activities. 

Unlike consumer credit reports that are available once per year for free as per the Federal Trade Commission, business credit reports must be purchased from the credit bureaus for a fee. The business owner can buy them, as well as any other interested entity, whether a lender, potential business partner or even a competitor. 

Consumer Credit Reports

Consumers can obtain a free credit report from each of the three consumer credit reporting bureaus, Equifax, Experian, and TransUnion, once per year as per federal law. Banks and lenders also have access to consumers’ credit profiles for the purpose of potentially extending credit.

Consumer credit reports typically include the following information:

• A list of credit accounts, including loans and credit cards
• Balances owed and the current monthly payment on each account
• The status whether the accounts are current and properly paid, or delinquent with the number of days past due
• A list of closed accounts
• Public records of liens, judgments, and bankruptcies
• Past and current employers
• History of residential addresses

Why the Separation of the Two Is Important

New businesses do not have credit histories. They usually rely on the founders’ or executive team’s personal credit profiles to apply for and obtain credit and to access capital. However, a separation should be made quickly, as individuals would not want to have their personal credit impacted by the business (i.e., missed payments), and the business would not want to limit its capacity to borrow what it needs.

According to Investopedia, it’s rare for a new business to get a loan without a signed personal guarantee by the business owner. The owner will still be personally liable for any loan obligations — even if the business is a separate legal entity — until a company establishes a business credit profile. This can be easily established at the bank where the business opened up a checking account, as the business can apply for a business credit card in which the payments will be made, thereby establishing and tracking a business credit profile for the company. Accounts with vendors and suppliers can also help build a business credit profile, as they can report payments to the bureaus.

Sources

Investopedia – Business Credit Reports vs. Consumer Credit Reports: What’s the Difference?

Federal Trade Commission – Free Credit Reports

Categorised in: Borrowing Tips

This post was written by David B. Coulter