Small business personnel must understand personal and business credit scores. These figures may affect their personal and business finances. Understanding how each score works, when one should be applied, and why they are relevant to your situation is useful for sustaining your money and further diversifying your business.
Business Credit vs. Personal Credit: What’s the Difference?
Your personal credit report tracks your borrowing history, credit card use, and payment behavior. In contrast, your business credit report covers similar activities for your business. Just like your personal credit score, your business credit score reflects how trustworthy your business is when it comes to credit. Lenders look at this score to decide whether to approve your business’s credit application.
Your chances of getting business credit can change based on your personal credit score if the lender checks it during approval, according to Experian. If they check, it’ll show as a hard inquiry on your personal credit report. Lenders report their activities to consumer credit agencies, which means both good and bad actions can influence your personal credit score.
Use a business credit card to cover your expenses and raise your business credit score. This will help you get credit more easily. A personal card won’t build business credit.
Does Personal Credit Impact Business Credit?
Yes, personal credit can greatly impact business credit, especially for startups and small enterprises. Certain company credit scores, such as the FICO® Small Company Scoring Service, take into account personal credit.
Also, since new businesses don’t have a credit history, creditors can look at the owner’s credit score to determine how trustworthy the business is. Personal credit can affect a business owner in these ways:
1. Loan Approval
Lenders often look at the personal credit history of business owners when they review business loan applications. Having a good personal credit rating means that one is likely to get the loan they want approved; this gives a chance for better terms and larger loan amounts. Similarly, a person with a low credit score may face higher interest rates, stricter repayment terms, or possibly denial of credit.
2. Applications for Credit Cards
Issuers of business credit cards monitor the personal credit of a business owner. Consequently, improved terms, such as high credit limits, low interest charges, and membership in loyalty clubs, may be obtained due to some positive credit performance. On the other hand, a lower personal credit score or, ‘‘bad credit’’, may lead to more costly and limited credit options.
Partnerships with vendors can offer new firms financing terms; suppliers and vendors frequently look at personal credit scores. Longer payment cycles and higher credit lines are two examples of the advantageous terms that result from having a good personal credit history. Maintaining supplier relationships and controlling cash flow may depend on this.
3. Developing Business Credit
Personal credit might initially serve as a basis for corporate credit development. However, a business can, over time, build its own credit using personal credit through a low credit utilization card and by always paying bills on time. With every new credit history in the company’s name, the owner’s personal credit score plays a relatively smaller role.
4. Personal Guarantees
It remained a prime market indicator that most lenders demanded a personal guarantee from the business owner, especially where the business has a short credit track record. A personal guarantee relates personal credit to corporate functions by placing the owner on the line for the company’s obligations. This explains the importance of maintaining solid personal credit because any mishap makes it hard to qualify for business funding.
5. Interest Rates and Terms
Your credit scores—both personal and business—affect the interest rates and terms you can get from lenders. If you have a solid personal credit score and a decent business score, you’ll likely see lower interest rates and better loan terms, which means less cost for your business.
6. Accessing Capital
A solid personal credit score helps the owner secure a small business loan or credit line, allowing the company to grow and establish its credit history. Most small businesses look at the owner’s personal credit report to assess capital in the initial stage. The owner’s credit report shows accounts from credit agencies. These accounts can include personal loans, home equity lines of credit, and personal credit cards.
7. Risk Analysis
Lending and credit institutions use personal credit scores to analyze risk factors. Lenders will likely offer loans to a business with a good personal credit score since it will testify to creditworthiness and lower default risks. On the other hand, a low personal credit score could mean higher credit risk and, therefore, more challenging credit conditions and less credit accommodation.
What Are the Various Scoring Models for Business Credit?
Experian, Equifax, FICO®, and Dun & Bradstreet are the principal credit bureaus that operate commercially out of the four. Scores can differ because each agency uses a different scoring system. A strong corporate credit score is usually found in the top 20% of the scoring range.
1. Experian Intelliscore
Experian provides Intelliscore Plus and Intelliscore Plus v2, using a scale from 1 to 100. The best scores are 80 and higher. Intelliscore Plus may be impacted by personal credit, particularly for startups.
2. Equifax
It provides the Business Credit Risk Score (101 to 992) and the Business Failure Score (1,000 to 1,610). Both take into account credit factors that relate to a particular company, such as bankruptcy, liens, judgments, payment history, and credit inquiries. Equifax business credit scores do not consider personal credit history.
3. FICO® Small Business Scoring Service (SBSS)
Lenders look at the FICO® Small Business Score℠ for SBA loans. This score goes from 0 to 300. It includes personal and business credit info. You need at least a score of 155.
4. Dun & Bradstreet’s PAYDEX® Score
This score goes from 0 to 100 and tracks how late your clients are in paying. If payments are more than 30 days late, especially 31 to 90 days late, they hurt your score more than those late by 15 to 30 days. Personal credit isn’t part of this score.
What Is the Importance of Business Credit?
Solid business credit proves your company’s responsibility and financial strength for several important reasons.
- Protect Your Personal Credit Score: Keeping personal and company money separate can protect your personal credit. Running a business has ups and downs, but you can preserve your personal credit score if your company is struggling.
- Obtain Business Funding: Your business credit score provides the potential for your company to be trusted to borrow. This is good for you because a good score may enable you to get more attractive terms, raise the limits on your credit line, and secure a lower borrowing rate. However, some lenders may want to see both your personal and business credit scores.
- Build Stronger Relationships with Vendors: Suppliers are likely to offer better terms to companies with strong credit, which supports their inventory and cash flow.
- Seek Better Business Opportunities: Businesses with high company credit scores may be more attractive to partners and investors. A high score shows that your company is stable. Plus, business credit scores are a valuable resource. A good score can raise your business’s value when you sell.
In summary, distinguishing between business and personal credit is essential for protecting your finances and securing better business opportunities. Building business credit independently can enhance your access to funding, improve vendor relationships, and support your growth.
Begin your fast and safe account opening with Cheqly!
Cheqly stands out in business banking with its streamlined account setup designed specifically for entrepreneurs. Enjoy easy access to essential financial tools that simplify payments, help you manage expenses, and support your business growth.
Get your Cheqly bank account today and begin your financial path!