Have you ever missed a credit card or loan payment? You may be surprised to learn that even if you “caught up” on your payments, your personal credit may still have taken a hit– and that could hurt your business credit score, too.
Many lenders review an applicant’s personal credit scores as part of the lender’s decision to grant or not grant a loan, according to Quickbooks. In a lender’s eyes, your credit score reflects how well you manage money.
As a small business owner or sole proprietor, lenders assume that if you can’t manage your own finances, you won’t be able to handle your business’s finances, either. Thinking about starting your own business in 2016? With no new taxes looming and housing and labor markets strong, now is the time to take smart financial steps.
There are several factors that contribute towards success of any business, such as the quality of product or service that you are offering, your customer service skills, marketing efforts and even your personal credit score play a certain role. Start now by understanding how your personal credit score affects your business credit.
1. Business Credit versus Personal Credit: What’s the Difference?
An estimated half of all business owners use some form of personal credit to finance their businesses, according to Experian. So while your business and personal credit reports are not linked, they can be related if you have used personal debt to secure your business debt. If your business is structured as a “sole proprietorship”, then under the Fair Credit Report Act (FCRA), some lenders are allowed to review personal credit histories for business lending purposes.
A business credit report typically includes the following:
- credit ranking score and credit summary
- corporate registration and contact information
- financial payment trends
- in-depth credit history
- insurance and leasing information
- S&P financial information
- credit inquiries made within the last nine months.
The business credit report will also include any judgment filings against the business, bankruptcy filings, and tax lien filings, should any have been issued.
Unlike personal credit score that range from 300 to 850 (with 680 or higher considered to be excellent), business credit ranges from 0 to 100; 75 or better is considered excellent. Like personal credit, however, your business credit score will be affected by more than just your ability to pay bills on time.
Factors that affect your score include the amount of available credit at banks or credit lines, the length of your credit profile, and the number of recent inquiries made to your credit profile, according to MyFico.com.
2. Establishing Business Credit
Once you are out of the initial stages of setting up your limited company and have grown your business, separating your business from your personal credit can help to reduce your personal credit risk for potential business problems.
To establish a business credit score, your business vendors will need to report your payment history to one of the major business credit bureaus (Dun & Bradstreet, Experian, Equifax or Business Credit USA).
Suppliers, wholesalers, leasing companies and other financial institutions may review your business credit prior to establishing a business relationship. Click To TweetKeep in mind that this business is sent in voluntarily; no business is required to report it. Consequently, if you want to grow your business credit, you need to be proactive in getting your information reported.
3. How Do US Credit Scores Compare with Foreign Countries?
Increasingly, today’s small business owners and sole proprietors are doing business not only in the United States, but also overseas. From India to the UK, business credit and personal scores matter. In India, for example, the CIBIL score (Credit Information Bureau India Limited) is essential for loan approvals.
The score ranges from 300 to 900, with 79% of all approved loans going to individuals with CIBIL scores of 750 or higher. In the UK, there’s no universal credit score, which means that each lender can score you differently, and you may never know why.
However, this does mean that if one lender rejects your loan request, that doesn’t mean other lenders won’t approve you– they may determine a completely different score for you! The three UK credit agencies (Experian, Equifax and Callcredit) will send information to any prospective lender.
Bottom line:
As a sole proprietor or a small business owner with fewer than 20 employees, your personal and business credit scores are closely linked in the eyes of banks and other lenders. It is critical that you monitor, evaluate and protect your personal and business credit rating just as you would another asset.