Your business’s credit and your personal credit score can both have an impact on how easily your business can obtain credit cards, bank loans, or other financing. Increased restrictions on credit in recent years means that more banks and financial service providers will take your personal credit into account when assessing your business’s creditworthiness.
Personal Credit
According to myFICO.com, your personal credit score is determined by a number of different factors combined into five categories. Each category carries a specific weight in determining your credit score – your payment history, for example, weighs much more than the amount of new credit you have.
The importance of each category can vary depending on your personal credit history. Here is the general breakdown of these categories and their importance based on percentages:
• Payment history (35%) – Whether or not you have paid your credit accounts on time is the most important factor that credit companies look at in determining your credit worthiness.
• Amounts owed (30%) – The amount that you owe is not, in itself, as important as the ratio of amount owed to total available credit. If most of your credit is tied up in a high balance that can lower your credit score.
• Length of credit history (15%) – Making payments on time and keeping a low balance-to-credit ratio can make up for a short credit history.
• New credit (10%) – Opening several new credit accounts in a short time period is considered risky behavior by the credit bureaus.
• Types of credit used (10%) – This includes credit cards, retail accounts, installment loans, auto loans and mortgage loans.
Business Credit
When you first start a new business, you may have to rely on your personal credit in
order to obtain financing or business credit. However, you should work to separate your personal and business credit as early as possible by opening a business checking account and applying for a business credit card. As your business grows and begins to have real revenue and costs, it is important to separate your financial records and have business-only financial statements. These will be required not only for tax purposes but also for interactions with banks if and when you apply for a loan.
A business’s credit can be scored in different ways.
• Objective financial performance – Banks and other creditors will ask to see your tax returns or a balance sheet and income statement. The financial data is computed to find a statistical likelihood that the company will default.
• Payment histories – Some commercially available credit scores use your relationships with vendors to establish a credit score.
• Community scores – A more formalized system for references, this type of credit score is established when a community votes on how the company’s payment performance has been in the past.
Combined or Global Credit Scores
In order for your business to gain access to bank loans and other financing, it is important to maintain good personal credit as well as business credit. As the owner of the business and, therefore, guarantor of the loan, your personal credit history will have an effect on the success of your loan applications and the interest rates you are offered by banks, credit card companies, and other issuers of credit.
• When applying for a business loan, your bank may look at both your business’s financial history and credit ranking as well as your personal credit score.
• Several new models of assessing a business’s creditworthiness have recently been developed. The Sageworks Business Credit Report, for example, determines a business’s creditworthiness using a statistical model that predicts the probability of default, and it incorporates both the business’s and the business owner’s financial position. By analyzing the financial records and historical behavior of over 4,000 small to medium-sized businesses, they can predict how likely a business will default on a loan. You can run this report on your own business so that you know, in advance, how a bank or other creditor will view your business loan application.
Megan Webb-Morgan contributed to this article. She is a web content writer for Resource Nation and writes about small business, focusing on topics such as business sales. Follow Resource Nation on Facebook and Google+, too.