You probably understand the importance of a good personal credit score—that's why you're diligently paying off those credit card bills from your Christmas vacation in Cancún. Lenders, landlords, and employers rely heavily upon your credit score (and your more detailed credit report) to gauge your overall creditworthiness. A good score is a foundation for financial success. A "poor" score means high interest loans, difficulty getting approved for an apartment, and skeptical looks from employers.
But did you know that your business has a credit score as well?
Why does a business credit score matter for small businesses?
Many small business owners rely on their personal credit (and credit card) to operate their business. But as your business gets bigger and your month-to-month lending needs increase, you'll find that there are a number of clear advantages to having a business credit line that separate from your personal credit.
A good business credit history and score can help you access more credit than you could receive when applying for financing using only your personal credit. And since businesses require a significant amount of capital to operate, a separate business credit line will help you avoid becoming overextended.
A good business credit score will also make vendors and investors feel more secure about extending credit to your operation. You can leverage your high credit score to negotiate lower insurance premiums, office space rent, or equipment leasing rates.
How are personal scores and business scores different?
Business credit ratings differ in several ways from personal credit ratings:
Bureaus, data, and models. Your consumer credit history is tracked by three main credit reporting bureaus—Experian, Equifax, and TransUnion—which, in turn, create your credit score using the FICO model. Because your credit history may vary from bureau to bureau, your FICO score may also be different. Your business credit history is also tracked by Experian and Equifax, but the primary business credit bureau is Dun & Bradstreet. Your business credit file with any of these agencies contains information provided by the business owner and vendors of the business. The business credit score bureaus don’t use an industry standard model like FICO to calculate scores.
Identification numbers. The bureaus listed above track your personal score with your Social Security number. Your business credit, however, is linked to your Employer Identification Number (EIN) or Tax ID Number, which is also how the government identifies your business for tax purposes.
Scores. The familiar FICO credit scores issued to individuals range from 300 to 850, with scores above 720 indicating strong creditworthiness. (Scores under 349 indicate that the individual doesn't yet have a credit history.) Business credit scores can range from 0 to 100, with higher scores (especially above 75) indicating strong creditworthiness. Business credit scores are also different from the credit ratings given to the bonds and other debt instruments issued by countries and large companies. These credit ratings are usually expressed through a series of letters or letter-number combinations (e.g. AAA or B2), while credit scores are always numerical.
Access and privacy. Under federal law you are entitled to a copy of your credit report from each of the major consumer credit bureaus once every 12 months. You can also get your personal FICO scores for free from several credit card issuers. Only you and some select parties (namely businesses or people with a legally recognized need) have the right to see your personal credit reports. All of the information in a business credit report, however, is public—but you and other parties have to pay to receive it.
Incentives and penalties. The credit reporting bureaus track the number of consumer credit financing inquiries, and repeated inquires can lower your score as looking for new credit can equate with higher risk. Multiple business credit inquires, however, do not impact your business score, as obtaining financing is perceived as a positive way to expand and grow your business.
Does your personal score impact your business score—and vice versa?
The short answer is soft of.
Your personal credit history will not directly impact your business score, but it will be considered by lenders and credit card issuers—especially if you are the sole proprietor.
Likewise, if you apply for a business loan or credit card using your name and Social Security number, those accounts may appear on your personal credit report.
How do you establish business credit? And how do you increase your score?
We compiled all the essentials you need to know about establishing business credit and boosting your score in this free guide.
As we always say at the end of these posts, none of the advice above should be construed as legal advice. If you have specific questions about establishing or improving business credit, you should speak with your financial advisor.