A variety of different factors are considered when creating your personal credit score. Lenders take different types of information into account when deciding if a person is viable to extend credit to — whether for a business or personal loan. One thing does hold true regardless: personal credit matters. It matters because it will affect whether you can rent or buy a house, buy a car, and in some instances, it will affect your chances of starting your own business without access to additional capital. Virtually every small business owner in the United States can tell you, good personal credit can make all the difference when it comes to getting a business loan because your personal credit can affect what you qualify for with business credit.
Since October 2001 when the Patriot Act was passed, banks require you to supply them with both your business information and your personal information.
This means that if your business credit is strong, but your personal credit is weak, you will have a challenging time securing funding — you become a guarantor for your business.
All lenders will look at a person’s personal credit history as a measurement to determine a person’s financial future. The better your personal credit score, the more likely you are to pay your bills on time and use your credit wisely. Your credit score determines your financial stability through the eyes of lenders — and these scores can range anywhere from 300 to 850, with an 850 being the best possible score you can attain.
Three credit agencies, Experian, Equifax, and TransUnion, compile these scores based on the information in your credit file. Five main components make up your score: Payment history (35%), Balance owed(30%), Length of credit history (15%), New credit (10%), and Types of credit in use (10%).
Knowing your personal credit score is extremely helpful not only for your personal finances but for your business as well. Business credit is considered an asset or economic resource that makes up the financial foundation of a company.
The creditworthiness of a business is an indication of how likely it is to make timely repayments on a business loan. But it’s more than that — suppliers, vendors, and landlords also look to your business credit score to gauge whether they should engage in business matters with you. Business credit is typically calculated using a Dun and Bradstreet PAYDEX Score — a unique, dollar-weighted indicator of a business’ payment performance based on the total amount of payment experiences in D&B’s file — gathered from suppliers and vendors that do business with you.
You can further help establish your business with good credit by abstaining from using personal credit and finances for your business. Put all expenses in your business name and use a commercial bank account to pay your bills. Keep monitoring your business credit file to be sure it is up to date and accurate — this will help you be aware of any change in your ratings before it affects your relationship with your customers, suppliers, or financial institution. Business credit can open up many doors longevity wise when growing a company. If you build business credit the right way, the business will get access to cheaper capital and more favorable terms.