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.
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Thank you for enlightens the viewers on what do if you are starting a business. The credit score is indeed a necessity for those who are planning to get a loan. It makes a good credit standing if you like to pursue it or not. It could be a risk. But, you can reduce your credit as needed.
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I agree with this post that how the personal credit score affects your business credit for the start of business. For any start ups you need to have the good credit score. Make payments on time to establish good credit.
Thanks for pointing out what we definitely need to be mindful of Ahmad!
And more times than not, it’s always best, to either pay your bills on time
or in advance, as often as possible, just to be on the safe side.
And thanks for sharing, the often overlooked International banking
concerns, which may also have to be taken into account!
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which article you post in this site . that is totally unique to the other and different also . this is very good thing and uniuqe tip for the business to credit rating for new business start ups is very important. all tips is fab . keep updating this type of amazing post .
Hi Meena,
They key is to pay everything on time which requires not taking on more debt than you can handle. Make a budget plan and focus on getting bills paid on time and your credit score will improve.
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Hi, Ahmed great article buddy. Credit score matter’s a lot when you need a big amount of money either for personal need or Business needs. I’m Working with leading financial service provider from last 7 years and found that 70% of peoples have crushed their credit score because of lack ok knowledge.
After seeing many peoples I’m also launching my financial blog (http://financebuddy.in/). Where I’ll share my experience, Ideas & Tips for getting best financial services.
BTW thanks for the great info. Hopefully, this will also help the peoples looking for finance with bad/good credit score.
Best regards.
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Hi Ahmad,
Thanks for sharing information about credit rating for new business start ups is very important .maintain newly start up business financial matter clearly will help in getting bank loans very easily.
almost every bank follow CIBIL score to analyse customer financial situation before sanctioning loan.
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Hey Ahmad,The separation between our personal credit and business credit can be tricky for small businesses, especially when we are the business. Building business credit aside from our personal credit is part of that equation. Pay business expenses with this card, not with our own personal card. This not only makes tracking expenses much easier, it helps us to build credit for the business as we use and pay off the card. If we are a sole proprietor, our personal credit and business credit are closely linked in the eyes of banks and other lenders. So it is important to take steps to protect both. We should monitor, evaluate and protect our credit standing just as we would protect any other business or personal asset. Eventually, thanks for sharing your worthy thought with us.With best regards,Amar kumar
Hello Ahmed,
Its really great to see you here, well to be honest I wasn’t ware of this business score and you have provided a great insights about it.
Thanks
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Hey Ahmad,
Not only in the US but in many countries the credit card score matters. When you go to apply for a loan then such type of things are required.
The bankers check your credit card history. How do you manage your money and many other things. You have elaborated it quite nicely.
Thanks for sharing with us.
~Ravi
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Hi there, Thank you for the information. This is very helpful article to start business. keep it.
How to run a startup with out money? I am planning to run my business but my budget is very small.
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Hi Eva,
Read 7 Reasons to Start Your Business on a Shoestring for some ideas.
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