For new small business owners and veteran ones alike, business credit and personal credit play a tremendous role in their business. Learn everything you need to know about both credit scores, how they can impact your loan eligibility, and your small business as a whole.
New small business owners — and experienced ones alike — must get to know the ins and outs of their business credit scores and personal credit scores and how they affect their small businesses. With economists predicting a recession in the near future, getting a grip on your credit scores can very well be the deciding factor in acquiring a business loan in the future.
In this article, get to know everything you need about personal credit and business credit, as well as:
And more. Get armed with the knowledge and get everything you need to know right now about these topics and become a much more effective small business owner after it.
A Quick Introduction to Business Credit Scores and Personal Credit Scores:
Before going into more in-depth topics, here’s a quick introduction to these credit scores and how they differ from one another:
Personal Credit Scores:
Your personal credit score is connected to your social security number, and it’s summarized to a specific number — FICO is the most commonly used method — for lenders to see your credit history, and how you stand with credit in a general view.
Note: while your personal credit is separated from your business credit, it’s still an important evaluation factor for lenders if you’re looking to acquire a small business loan.
Business Credit Scores:
Unlike personal credit scores, business credit scores have different variables used in their calculation. It works as a form of a report for lenders to know how your business stands with debt, bills, industry, and recurring revenue.
Most business owners will have an Employer Identification Number (EIN) or Tax Identification Number (TIN). This identification number separates your personal credit from business credit unless it’s a single-person LLC or personal business.
Who Calculates Credit Scores and How Are They Calculated:
As you saw above, personal credit scores are calculated and give you a set value. If you need a personal loan, the lender will check your FICO score and determine your eligibility for it. The three major credit bureaus that calculate your score are Transunion, Equifax, and Experian.
To calculate these values, they use several methods that include:
- Your repayment history: if you pay back on due dates, it will improve your score;
- How much credit do you use: if you don’t use a high percentage of credit, that’s a good sign for lenders;
- Credit history: lenders like to see you have a history of acquiring credit. But not too much, as it can signal a red flag;
- Credit inquiries: if you don’t apply for credit too often;
- Discrepancies: unpaid credit, ID theft, wrong data, etc.;
Business credit, although different as you saw above from personal credit, it involves similar methods to calculate your business eligibility. The most common credit bureaus that calculate business credit scores are Dun & Bradstreet, Equifax, and Experian. And to calculate your business credit, they use information such as:
Does Personal Credit Scores Impact Business Credit Scores and Vice Versa?
Yes. Both credit scores can impact each other, as you’re responsible for both. Here are a few ways how they can interact and conflict:
Personal Credit Impacting Business Credit:
- You have no business credit: If you don’t have an EIN or TIN, you cannot have a separate credit score. Therefore every expense and every financial movement you make on your small business is directly correlated with your personal credit.
- Providing a personal guarantee: Any personal guarantee you provide will, in tandem with your personal credit, decide your creditworthiness. While many borrowers might insist on you providing one, it’s a factor you must carefully weigh in its risks.
- Not having a polished business credit history: One of the major concerns with new businesses is not having a solid — or even existent — business credit history to show the lenders, therefore, no credit score. If that’s the case, many lenders will correlate your personal credit history with more factors on your loan request and business data.
Business Credit Impacting Personal Credit:
- Providing a personal liability: If you’re a new business, it’s more than likely the lender will require a personal guarantee — which can come in many forms, from real estate, personal assets, and even a bank account. Doing so will elevate your creditworthiness and also your credit score.
- Lenders requiring a personal credit number: Your small business finances and financial health status might not be the only requirement for lenders. Some small business loan offers like the Small Business Administration require your EIN or TIN numbers and your SSN with your credit score number. Be sure that if you’re considering applying for, namely, an SBA 7 loan, to have all your personal and business credit statements in order.
- Late payments on your small business loans: It’s not surprising that if you’re responsible for a small business, you’re also responsible for its credit, which can impact your personal credit. Therefore, if you consistently miss payments — or worse, default on your loan — credit bureaus will correlate it to both credits, putting you in a difficult place to get a loan in the future.
What’s the Difference Between Business Credit Cards and Personal Credit Cards:
Without much of a surprise, both types of credit cards have their differences, and it’s important you get to know them to select the best one for your business at the moment. Let’s dive into the major differences between them:
- Reporting Policies and Credit Impact: For personal credit cards, credit card issuers pass any information about your credit score to the three major credit bureaus. On the other hand, while business credit cards do report changes to their bureaus, it has little to no impact on your personal credit score, saving some exceptions like late payments or loan defaults.
- Credit Limits: Business credit cards, unsurprisingly, tend to have higher credit available to you than personal cards. However, the application process for a business credit card and its interest rates are very different from that of a personal one.
- Rewards: While bonuses are a common offer in both types of cards, personal credit cards offer discounts in fields such as traveling, restaurants, clothing brands, etc. Business cards offer rewards for business expenses and growth, such as phone bills, advertising, office/industrial supplies, etc.
- Taxation Benefits: Business credit cards make it very easy to identify any tax-deductible spending on your business credit report and business spending, which can be very helpful while running a small business. Personal credit cards rarely offer such an option.
- Consumer Protection: Consumer protection laws are a different topic. The 2009 Consumer Credit CardAct rarely applies to business cards, which could sway your choices, although some issuers offer some protection as a courtesy.
- APR Offers: Although some business card issuers have a 0% APR offer, they tend to be shorter and not applicable to anything. Also, for a small business credit card, the APR could be changed overnight or charged exorbitant fees for any infraction, depending on the offer.
How Business Credit Scores and Personal Credit Scores Affect a Small Business Loan Application:
As you saw throughout this article, both types of credit do impact any small business loan application, and most types of lenders do require business credit scores and personal credit scores for such.
How each of them impacts the type of loan you decide to acquire is very different. For instance, a Small Business Administration loan (SBA 7, SBA 504, etc.) and bank loans care about business credit and personal credit. As a rule of thumb, it’s required to have a FICO credit score of 680 or higher for those types of loans, which also involve other deciding factors.
On the other hand, for less established small businesses, you can opt for unsecured or a lower amount loan offer — like a business line of credit, equipment financing, or even alternative lenders, such as Biz2Credit.
With our help, you can get the best financing option available for your business, fast, easy, and with the smoothest interest rates and repayment terms possible, taking into account the state of your small business.
How to Improve Your Credit Scores:
To make sure you’ll have the best offer available to you, you must look at both your credit scores and work on improving them. Let’s look at a few steps you can start to do so:
Business Credit Scores:
- Separate Business Bank Accounts From Personal Ones: One of the most important ways to build business credit — which many small business owners swear by — is to separate all business bank accounts from personal ones. Not only does it look more professional, but reporting agencies will have an easier time calculating your business credit reports.
- Stay up to Date With Your Repayments: Safe to say that a delinquent or default loan program doesn’t look good on any business owner’s public records. To avoid any lenders denying your business funding request, stay up to date with any repayments you have at the moment.
- Get Small Business Funding: While it might seem like a Catch-22 — getting business funding to get good business credit for business funding — it’s a great way to create a snowball effect on your business credit. While an SBA loan might not be an option, for now, you can look to other funding offers to improve your credit scores.
- Improve Your Business Statements: Improving your annual reports, business plan, payment histories, increasing your cash flow, etc., doesn’t only help you improve your Business credit score, but it’s essential for the success of your small business.
Personal Credit Scores:
- Make Repayments on Time: Making on-time payments is one of the easiest ways consumer credit bureaus see that you’re a trustworthy borrower and deserve to improve your credit eligibility.
- Have a Good Variety of Credit Accounts: Keeping up with the step above, try and get more variety of credit. It’s important to increase your credit utilization ratio, but don’t go overboard, as it’s not worth risking a due payment.
- Don’t Reach a Credit Limit: With various credit vehicles with on-time payments, the next step is to avoid a credit limit. With this, lenders will become at ease if they see you don’t pass the roof of credit offers.
- Build a History Without Red Flags: To end it up, repeat all the steps, make sure your credit data is correct, and have enough available credit in all your personal credit vehicles. Keep repeating, and your credit score will increase over time.
- Don’t Forget your Personal Finances: None of the steps above will work if you don’t have your personal finances as the main priority. While it’s good to have various credit offers to build a solid credit profile, you must make sure your finances don’t suffer, and you must make sure you can maintain the due payments at the end of the month.
Having a Hard Time Finding a Small Business Loan With Your Current Credit? No Problem!
While building a solid personal credit report and business credit report is essential for getting a small business loan, sometimes you get rejected anyway. While you risk yourself by increasing your credit scores, a simple factor can send your loan request down the drain.
If you’re having difficulty finding small business funding — or if you don’t want to put your small business at risk by adopting many of these credit vehicles — reach out to Biz2Credit. With Biz2Credit, chances are you’ll get approved for a small business loan without the qualifications traditional lenders require!
Reach out to our team and get to know the best business funding option available to you! Do the same as Brian, CEO of The Party Staff, even when his business was going through difficulties without other funding options, he reached out to Biz2Credit and got approved in an hour! If you need funding now, don’t hesitate and fill out this application today!
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