Does a Default On My Business Credit Go on My Personal Credit?

For small business owners, the line between personal and professional expenses can be razor thin. Depending on the way the business is organized, an entrepreneur can limit his personal exposure to business credit risk, but some banks are starting to blur the traditional line between a business and its owner.

Business Organization

Entrepreneurs organize their business under one of several options. A corporation or a limited liability company protect the business owners from personal liability for purely business-related obligations, while a partnership or sole proprietorship may not. While the method of business organization protects the owner, it may come at the expense of credit availability for the business.

Personal Guarantees

When a business owner elects an LLC or a corporation, the new entity will not enjoy a robust credit history. Although some commercial lenders will evaluate a company's asset base and business plan, many lenders -- including commercial landlords -- may require that the owner provide a personal guarantee on the business loan. If that personal guarantee covers a business loan that goes into default, then the owner is fully personally liable for the debt.

Bank Behavior

Banks have only recently begun supplying business credit data to the credit bureaus. As this practice becomes more routine, other potential lenders may see associations to business debt on a personal credit profile. Even if the business owner is protected from personal financial liability for the debt, the debt may nevertheless become associated with the owner and become a factor in personal credit scores, according to entrepreneur expert Karen Kline.

Default Avoidance

In the financial long run it's always best to avoid default. If a default on some loan or contract becomes unavoidable, business owners should try to insulate themselves from the personal fallout by shifting the debt or working with the lender to extend repayment without going into default. Minimize overall risk by working with an accountant to identify the right business structure and funding arrangement to protect the business and owner from personal debt obligations -- including limiting personal guarantees on business debt.