As individuals we spend years establishing, managing and protecting our good personal credit ratings. With strong personal credit, access to favorable interest rates and terms when applying for credit and financing may be available at the stroke of a pen.
When you have the ability to obtain financing at the best available bank rates for items such as a new automobile, home, or investment property; you have established a strong personal credit asset.
As a business owner, having good personal credit ratings provide leverage to potentially qualify for various types of business funding. However, using personal credit alone does not enable a business owner to maximize the company’s true financing potential.
When you build your small business credit; the business itself establishes its own unique credit identity with the business credit reporting agencies. With an established business credit file; banks, suppliers, vendors, retailers and other businesses will be able to assess your company’s creditworthiness rather than rely on personal credit alone.
Here are the 4 key differences between small business credit and personal credit:
- Credit Checks – When you apply for personal financing you provide your social security number on credit applications. This is the information a bank uses to trigger an inquiry with a consumer credit agency in order to review your personal credit report. With business credit, your company provides an Employer Identification Number (EIN) or D-U-N-S® number on credit applications in order for banks, vendors or suppliers to check your business credit reports.
- Credit Identity – As an individual you have the ability to establish only one credit identity that is tied to your social security number. As a business you have the unique ability to create a business credit identity for each business you own. Since each business entity is assigned its own Employer Identification Number, it can also establish its own individual business credit file and score.
- Credit Capacity – Your personal credit worthiness is based on your ability to pay your financial obligations such as credit cards, student loans, auto loans, mortgages etc. Your personal credit capacity is impacted by many variables including but not limited to debt to income ratio, new credit, payment history, credit utilization, credit limits, and inquiries. With small business credit; a company’s credit capacity is based on factors such as company revenues, years in business, tangible and intangible assets, credit card transactions, payment history, industry classification, credit limits, inquiries, and a host of others.
- Credit Ratings – The most popular credit scoring system used for personal credit are FICO® scores. According to Fair Isaac, 90% of "top" U.S. lenders use FICO® scores.
However, with business credit there is no single uniform risk assessment model used by banks, suppliers, vendors and retailers. Instead, various risk assessment tools and scoring systems are used such as FICO® SBSS, Paydex®, Intelliscore, and the Small Business Credit Risk Score.
As you can see there are major differences between business credit and personal credit. As a business owner it’s vital to invest the time in building your small business credit. Ultimately, a strong business credit report and score will enable a company to acquire credit and financing based on its own creditworthiness with favorable rates and terms.
By Marco Carbajo, Guest Blogger for SBA
Published: February 9, 2018