Does personal credit have an impact on business credit?
Whether securing a mortgage, financing a car or simply entering into a smartphone contract, at some point or another, you’ll have had to think about your personal credit rating. As a business owner, you might be aware that you have a business credit rating based upon your company financial history. You may even be wondering whether they are linked. Does your personal credit rating impact your business credit rating? Let’s find out.
Business credit vs. personal credit
Your business credit and personal credit ratings are held separately, one relating to you as a customer, the other for you as a business owner.
Your personal credit rating is derived from your borrowing history. The score is calculated from information such as payment history, outstanding debt, the types of credit account, whether you are on the electoral roll and, indeed, the length of your credit history. A higher score indicates that you are a better risk and banks and lenders will be more inclined to lend to you at favourable rates.
Your business credit rating is a measurement as to how financially reliable you and your business are deemed to be. Business credit ratings are derived from the payment history of your business, the length of its credit history, the size of the business and any specific risks inherent in your industry. Once again, the higher the score, the better the risk your business presents to potential lenders.
While the principles may be similar, business credit is entirely separate from personal credit, but both should be monitored carefully.
How is my business credit evaluated?
A number of factors will inform lenders as to whether your business is viable and a reasonable risk. A bank or lender will use some of the following to formulate an overall picture of your professional financial performance:
- Business repayment history
- Any bankruptcy or debt management judgements
- Details of ownership
- Company accounts
- Previous trade credit secured
- Successful and unsuccessful applications for finance
- Existing credit available to the business
How to build business credit
You might have an exemplary personal credit score only to be surprised to find that your business credit rating is less than stellar, despite there seeming to be no problems. With no debts, why would a lender not want to advance your business money? Business credit ratings will, after all, influence the outcomes of the following:
- Requesting higher trade credit limits from a supplier
- Asking for lower premiums on business insurance
- Negotiating lease terms for equipment and rent
- Payroll credit
- Bidding on contracts
- Seeking line-of-credit increases
- Negotiating more favourable interest rates
- Applying for a loan to cover unexpected emergencies
The reality is that lenders will be wary of advancing your business money if they have little information as to whether you will be able to repay the loan and limited data to show how your business is doing. Building up a financial history with responsible borrowing and on-time repayment will improve your business credit rating.
There are a number of positive steps that you can take to improve your score. Register your business with the major credit reporting agencies. If you haven’t already done so, open and use a basic business bank account for business payments. Ask any company with which you regularly do business, such as suppliers, to submit payment experiences to the credit reporting agencies.
Always pay vendors, suppliers and staff on time and only use business credit or business accounts for business expenses; never use your personal credit facilities. All of these actions will demonstrate responsible borrowing behaviour that will contribute towards a healthy credit score for your business.
Does personal credit impact on your business credit?
The short answer is yes. Whilst, as we have seen above, personal credit scores and business credit scores are managed and accessed separately, your personal credit as a business owner (and those of any fellow owners, directors or partners in the business) can directly affect whether your business can apply for credit.
For example, a card provider will investigate your personal credit history should you apply for a business credit card. After all, if there is no company credit history, a lender has only the information in your personal credit history to judge whether or not your business is likely to be able to repay any debts.
If your personal credit rating is poor, you will be unlikely to be offered the card. This may show as a declined application on your business credit history which is hardly an auspicious start. While your personal credit isn’t the only factor used to decide on lending transactions for your business, a low or high personal credit score can make a substantial difference.
It is therefore essential that your personal credit score is in good order before you consider applying for business finance of any form. The better your personal credit profile, the more likely you will be able to negotiate reasonable terms and low-interest rates for any lending associated with your business.
Will a business loan affect your personal credit profile?
In applying for a business loan, if there is insufficient business credit history the lender will almost invariably check your personal credit file. The lender may carry out a ‘soft’ or ‘hard’ credit search. A soft inquiry should not impact your credit score, but if a hard inquiry is undertaken and the loan to your business is subsequently denied, this may potentially have an adverse effect on your personal credit rating. It is always wise to conform precisely how any given lender will use your credit information before proceeding with an application.