As a small business owner, it’s vital to understand the difference between your personal and business credit scores. With 75% of Live Oak’s small business customers poised to expand their business in the near future, knowing how to prepare for a small business loan will be critical, and credit scores play a big role in securing a loan. Personal and business credit score numbers are independent of each other but are often used together to determine your ability to secure a business loan. Let’s break down the difference between these two important numbers.
Personal Credit
Using your Social Security Number (SSN), three different credit reporting bureaus (Equifax, Experian and Transunion) track your personal credit history which is then used by FICO to generate your personal score. The FICO score is based upon several different factors, including your payment history, amount of money owed, length of credit history and types of credit cards used. Developing good habits like paying your bills on time, avoiding “maxing out” your credit cards, keeping your credit card balances low and keeping credit accounts open for extended lengths to prolong your credit history will all positively affect your personal score.
Personal credit scores can range from 300 to 850. Scores between 800-850 are considered excellent and signify low-risk borrowers, while scores between 740-799 are very good and scores between 670-739 are good. For SBA small business loans, the minimum credit score is 650, but some loans may require a higher score. Overall, the higher your personal credit score, the lower the credit risk you are, and you may receive more favorable loan terms from a bank.
Business Credit
Your business credit score measures your company’s credit worthiness and offers insight into the financial health of your company. Your business credit score is attached to your Employer Identification Number (EIN) and tracked by the Small Business Financial Exchange. The three main business credit bureaus are Dun & Bradstreet, Equifax and Experian. You must register your business with one of these credit bureaus to establish your business credit, and each bureau determines your score using various factors with different score ranges.
Like your personal score, the higher the number, the more financially trustworthy a borrower might be. However, unlike your personal credit score, business credit scores can be checked by anyone. It is important to check and manage your score regularly. Your company’s payment history, debt, debt usage, industry risk, company size and length of credit history are all components that could impact your business credit score. If you anticipate applying for a small business loan, make sure you know your business credit score and take time to make improvements if needed. With a high business credit score, lenders could be more likely to offer favorable rates and terms on small business loans. Lenders will feel more confident that you’ll repay your loan. It could also impact your insurance premiums – your business is viewed as less of a liability with a higher credit score. You may also be able to negotiate longer payment terms with your vendors, which could help with your cash flow.
Building business credit takes time. You can start building business credit by registering your business with the secretary of state, securing your EIN number, and opening a business bank account and credit card for your business. Keeping your business and personal credit separate is important for tax purposes, credit purposes and applying for business loans in the future.
Establishing and building business credit is crucial to fueling the growth of your business, especially if you plan to take out a small business loan. Good business credit may allow you to borrow money in a pinch, whereas a low business credit score will make it that much more difficult. Establishing and maintaining business credit should be a top priority for your small business operation. It can take time, but the benefits will be well worth the effort.
