The Unexpected Connection: Credit Scores and Your Business Plan

Business.com / Strategy / Last Modified: February 22, 2017

When you're running a small business, it's far too easy to mix business credit with personal finances. And potentially a huge mistake.

People who decide to start a business (or fall into it almost accidentally) are often unaware of the impact their credit scores can be to the growth of that business.

There are two types of credit, and the way to build them is different.

You can use both for your business, and both need to be high and maintained if you want to use credit to help your business grow.

Related Article: Before You Swipe: 10 Important Things to Know About Business Credit Cards

What Makes Up Your Credit Score?

Most people have a vague idea of how their personal credit score works.

Your FICO score determines if you are able to get a car loan or a mortgage, and at what interest rates. Typically, scores range from 300 to 850.

The higher the score the better your credit, and the better the terms of any loans. Credit scores are determined by payment history, the amount owed, length of credit history, type of credit, and new credit or credit inquiries.

Less obvious factors also affect your credit score, such as age, how often you use credit, and how much of your credit you use.

Few lenders will consider a business owner with a FICO score lower than 640.  Many banks won’t consider you if your score is under 680, including loans backed by the SBA.

Business credit scores are not as uniform as personal credit. Different credit monitoring companies come up with their scores independently each using its own method.

The three main companies offering business credit ratings are Dun & Bradstreet, Equifax, and Experian. Business credit scores fall somewhere on a scale of 0 to 100. Anything above 75 is considered excellent.

Pie chart outlining business credit rating percentages

While the exact formulas vary, some of the things the companies look for include: 

  • Number of years in business; more than two establishes viability.
  • Annual business revenue.
  • Business collateral.
  • Recent lines of credit you have applied for and opened.
  • Payment history.
  • Percentage of available credit used - are you charged up to your current limit?

If Your Credit Is Not Up To Par

Don't despair. If you're looking for a business loan and your personal credit is bad, you're not necessarily out of luck.

With regular cash flow, you may be able to obtain a revenue -based loan of up to 10% of the annual business deposits.

Other modern options include Angel Investors, crowdfunding via Kickstarter or another platform, and collateral loans on your personal property. One note of caution: Don't bet the farm unless you are sure.

Related Article: Why Smart Entrepreneurs Separate Personal From Business Credit

Establishing Better Credit for Your Business

As mentioned previously, you can use your personal credit to fund your business. However, there are some compelling reasons you should keep these lines separate.

One of the biggest reasons is simple math; you can borrow more as a business. But there are a lot of other great reasons as well, including making your taxes easier, if your business is sued it’s less likely you will lose personal assets, and it protects your personal credit.

But how do you establish the business credit you need?

The first step in establishing business credit is incorporating and registering for a tax identification number.

Once you have the number, register the business with credit bureaus and get a DUNS number. Apply for smaller lines of credit with suppliers you are already working with to establish a good payment history.

Make sure your personal and business bank accounts are separate and apply for a business credit card or loan. Finally, make sure you mark your calendar to check your credit score quarterly.

Creditors look for indications that a business is viable and potentially profitable before investing.

They want to see a business owner with a workable plan. To help convince lenders of your authenticity, set up the basics before approaching any lender or credit agency: 

  • Write a business plan.
  • Establish a business license with an official business address and phone number.
  • Set up and maintain detailed financial records, tax receipts, and personnel records.

No lender wants to invest in a risky business run by someone without a plan.

If you get everything together and have plenty of documentation to show potential lenders, you have a much better chance of getting the financial backing you need. You also need to be mindful of paying your bills on time.

In business, everything is important.

Speaking of establishing good payment history, there are a few tricky things about business credit you should keep in mind.

One of the most important: Pay your bills early. The only way to have a stellar score for some of the agencies is to be better than on time, you really need those debts paid off before the due date.

Related Article: Building Your SBSS Score: Steps to Improving Your Business Credit

Business Credit Can Also Affect Personal Credit

Even if you're trying to keep your personal and small business finances separate, you may be surprised to find business credit cards on your personal credit report, which can be disconcerting.

Suppose you have a temporary business setback and your business credit suffers? Will it kill your personal credit at the same time?

The answer largely depends on the type of credit cards you open. Some commercial business cards do not report to consumer credit agencies.

If you're careful, you can limit the personal risk and keep your finances above the fray if your business takes a downturn. With your personal credit intact, you'll have the credit necessary to start over or refinance.

So what does all of this mean for you? That depends on what stage your business is in. If you’ve just started and are a sole proprietor, you will probably need to rely on your personal credit for a little while as you build your reputation.

Make building and maintaining your personal credit a priority. If you are in the planning stages and want to hit the ground running as a full fledged business opening the doors to a shiny new shop, focus on your personal credit as you take the first steps towards building your business credit.

If you have an established business and are looking for greater growth, you need to begin implementing the steps to build your business credit right this minute.

No matter what stage you're in, the long-term goal needs to be transitioning to business credit. It may seem intimidating, but it is definitely worth the time and effort to keep your personal and business credit separated, even for a one-person shop.

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