What small business owners need to know about credit
SAN JOSE, California, June 2, 2021 / PRNewswire / – Many small business owners use their personal credit when starting a business for the first time or during downturns. However, your business can also have its own – completely separate credit profile. Building business credit can help you save money and grow your business. But for many small business owners, personal credit can still be a major factor in qualifying for business financing.
For more information on loans and credit, visit the myFICO blog at https://www.myfico.com/credit-education/blog
The difference between personal credit and business credit
Your personal credit depends on your consumer credit reports credit bureaus – Equifax, Experian and TransUnion. Your creditors, such as lenders and credit card issuers, report your account information to the credit bureaus. Then your FICO® Notes are based on those credit reports.
Likewise, once a business is incorporated as a limited liability company (LLC) or a public limited company, it can also build its own business credit file. Business credit reports are managed by Dun & Bradstreet (D&B), Equifax and Experian – the latter two have separate consumer and business credit databases.
A business’s creditors and sellers can report its accounts and payments to business credit bureaus, which can then create business credit reports. There are also business credit scores, such as the FICO® Small Business Scoring Service℠ (FICO SBSS), which creditors can use to assess a company’s creditworthiness.
Unlike mainstream FICO® Scores, which range from 300 to 850, the FICO SBSS score ranges from 0 to 300 and is used by many small business lenders to assess applications for other types of business financing.
How Business Credit Can Help Business Owners
Building and strengthening your business’s trade credit can help the business:
- Get better business loans and lines of credit
- Benefit from reduced rates for business insurance
- Receive longer terms from sellers and suppliers
- Qualify for government and corporate contracts
- Collect money from investors
In short, a good business credit score can help you save money, smooth your cash flow, and grow your business.
In some cases, your company’s financial statements and history with suppliers or partners may be more important than its credit scores. But building a good business credit score can always give you a head start in the long run.
Why your personal credit is always important
Over time, some businesses grow to the point that creditors offer them loans or lines of credit based solely on the finances and credit of the business. However, this is not the case for most small businesses.
While a strong business credit profile can help you qualify for better financing, be aware that:
- Many lenders will continue to check the personal credit of all business owners
- There may be a minimum of FICO consumption® Score requirements for all business owners
- Some business credit scores incorporate owners’ personal credit
Even if your business qualifies for a loan without a personal credit check, you may still need to sign a personal guarantee. Collateral means that you are personally liable for the debt if the business cannot afford the payments.
Separate your business and personal finances
As a small business owner, the success of your business can be closely tied to your personal finances. However, it is important to keep your business finances separate from your personal finances.
For example, if you use a personal credit card for business expenses, you might have a high utilization rate it harms your personal FICO® Scores. You may have difficulty qualifying or receive lower rates on a credit card or loan, even if it is for personal use. Having a business credit card or a business line of credit that is not reported to consumer credit bureaus might be a better option.
Similarities between your business and your personal credit
Your business and personal credit reports are completely separate, but the processes have some similarities. Here’s a quick rundown.
- Establish a business structure (such as an LLC or corporation)
- Register your business with D&B
- Open credit and term accounts that are reported to business credit bureaus
- Make your loan payments on time
- Make net term payments on time or in advance
- Have a credit card or loan reported to consumer credit bureaus
- Make your payments on time
- Use only a small portion of your available credit on revolving accounts
Both business and personal credit scores attempt to predict the likelihood that a borrower will miss a payment in the future. With that in mind, it makes sense that it’s important to have a payment history on time.
With a good understanding of why business and personal credit can be important to small business owners, you can continue your research online. If you want to know more about personal credit, myFICO.com consumer credit resources can help.
myFICO makes it easier to understand your credit with FICO® Scores, credit reports and alerts from the 3 bureaus. myFICO is the consumer division of FICO – get your FICO scores from the people who do the FICO scores. For more information visit https://www.myfico.com.