Understanding Business Credit

Business credit and personal credit are very different animals, so it’s important to understand what’s different, what’s similar, and what you can do to build a strong personal credit score and a good business credit profile.

Understanding both is important because, for most small-business owners, their personal credit score, in addition to their business credit profile, will likely be part of any business creditworthiness evaluation.

Because personal credit and business credit are different, every business owner should be aware that they basically have two profiles. What’s more, unlike personal credit, a business owner starts building a business credit profile as soon as their business is registered in the state where they do business, even if they don’t currently have any business debt.

Your personal credit score is typically based on the FICO score (a score between 300 and 850) with only minor variations from bureau to bureau. Although the personal credit bureaus might differ slightly from one another, your FICO score is based on the following data points:

• 35% is based on your payment history
• 30% reflects the amount of credit you have compared to the amount of credit you use (a lower ratio is better)
• 15% is influenced by the length of your credit history (longer is better)
• 10% is based on the type of credit you use (a mortgage, an auto payment, and a credit card are a better mix than simply a mortgage, for example)
• 10% is influenced by the number of new credit inquiries you have (every time you apply for credit, it could potentially ding your score)

Because over half of your score is a reflection of your payment history and the amount of credit you use compared to the amount of credit you have available, making timely payments is the single most important thing you can do to build a strong personal credit score. And if you can manage to keep the percentage of credit you use under 30%, it will also positively influence your score.

Lenders usually look at your personal credit score because they are trying to determine what you will do in the future based on what you’ve done in the past. Your personal credit score gives them insight into that. Although different lenders weigh your personal credit score differently, traditional business lenders like banks and credit unions will often not approve an application if your personal credit score is below 680 (and they prefer to see a score over 700).

That being said, there are a number of other small-business lenders that will work with a business owner who has a lower personal score, provided other business metrics demonstrate the ability to make loan payments successfully.

Your business credit is more than a simple score.

The average business credit report will likely include a number of “scores.” For example, Dun & Bradstreet includes their 100-point Paydex score, while Experian also has their own unique 100-point score they call the Intelliscore. So when thinking of business credit, it makes more sense to consider business credit as a profile containing multiple scores.

Your business credit profile tells a fairly complete credit story about your business, which includes these four types of information:

1. General information about your business—including your address and industry
2. Detailed information about the credit relationships you have with vendors and suppliers
3. Your payment history with any current business loans, lines of credit, and business credit cards
4. Any legal filings that are part of the public record like current loans or bankruptcy

The two biggest drivers that influence your business profile include your business’s credit history and information that’s available within the public record.

Unlike your personal credit score, which is private unless you give a potential creditor permission to access it, your business credit profile is public. Anyone can contact one of the business credit bureaus to get a look at your business profile without your consent. Anytime you apply for business credit, you can expect the potential creditor to access your business credit profile.

There are a number of business credit reporting agencies, but the top three are Dun & Bradstreet, Experian, and Equifax. Experian and Equifax are also two of the largest personal credit bureaus.

Different lenders weigh what they look at differently. In other words, depending on the lender, some information is more important than other information. These are some of the common things lenders consider when they look at your business loan application:

• Your personal credit score
• Your business credit profile
• Your business cash flow
• Your annual revenue
• Your time in business
• Your industry

They are trying to determine whether or not you have the revenue and the history that proves you can make periodic payments. They consider your industry because some types of businesses are considered higher risk than others. Some lenders may not even consider a loan in what they would identify as a “restricted” industry (this “restricted” industry list is unique to each lender).

Depending on the lender, a restricted industry could be considered businesses like bars, nightclubs, or medical marijuana dispensaries. In addition to these types of businesses, some lenders won’t lend to restaurants, financial advisors, or law firms. This list should be called out somewhere on their websites, so it makes sense to look for the restricted industry list before you apply.

Traditional lenders, including lenders that offer loans guaranteed by the SBA, will also require additional information to evaluate your creditworthiness:

• A detailed business plan
• Resumes of the business owner or owners (if there are more than one)
• A personal credit evaluation of all the principles
• A list of any available collateral

Traditional lenders, like banks and credit unions, are looking for ways to mitigate the risks associated with offering a loan—in addition to evaluating your creditworthiness. Think of it as an effort to ensure the borrower has enough skin in the game to make every periodic payment. They want to confirm, as much as they can, that there is the least amount of risk possible with a loan.

In other words, the better you can demonstrate (through revenue, cash flow, and track record) that your business is able and has a track record of making periodic loan payments, the better your odds of securing a small-business loan.

When a lender evaluates your business credit profile, they are looking for more evidence that you have been able to successfully make loan payments in the past. It’s probably safe to say that everyone has likely made a late payment from time to time, but if your payment history includes more positive than negative information, your business loan application is more likely to gain approval.

The good news is that if you have a less-than-perfect business credit profile, it doesn’t really take long to make the changes you’ll need to improve. You can start by making sure your periodic loan payments, your supplier payments, and your utility bills and building lease are all paid on time. As you show that you can make timely payments, your business credit profile will improve.

If you’d like to know why your personal credit score is so important for your business credit, check out our article on why personal credit matters to business lenders.

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