Personal vs. Business Credit Scores

Personal vs. Business Credit Scores in Canada

A good credit profile makes a huge difference in the financial success of any business. How a business maintains its credit is reported to credit bureaus just like personal credit. Likewise, this information is used to create a numeric business credit score, which lenders use as an indicator of creditworthiness. A solid score also builds up the company’s reputation in the business community. 

As with individual credit scores, low numbers can lead to credit application denials, high interest rates, and additional fees when a business applies for credit. A higher credit score indicates that the business is a low-risk reliable borrower which can be an invaluable business asset. Although individual credit ratings are equally important, there are some key differences between personal and business credit scores.

Differences Between Personal and Business Credit Scores

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Personal vs. Business Credit Scores

There are some similarities between personal and business credit reports and scores. For instance, a consistent timely payment history will raise both types of scores. Additionally, each type of credit report should be reviewed regularly for errors that can affect the score. However, there are several distinctions between the two, which include:

  • Individuals can get a free report from the three major credit bureaus each year. Personal credit reports are also available from banks and credit card issuers. Businesses have to pay for their credit reports and scores.
  • In general, personal credit scores are 300 to 850; a business credit score can be as low as zero to a high of 100.
  • The algorithms used to calculate business credit scores do not follow industry standard. Most consumer credit bureaus use FICO (Fair Isaac and Company) data analytics as the standard to score personal credit.
  • Personal credit reports can only be seen by the borrower, those authorized by the borrower, and other parties (such as courts). Business credit reports are open to the public for a fee.

The majority of business credit scores and reports include only accounts that are listed under the legal company name. However, some small business lenders will take the personal credit score of an applicant into consideration when making a decision.

Personal Credit for Business Use

It is not unusual for a brand new business owner to use personal credit to get started. Items such as licensure, equipment and other necessities may be needed long before the company establishes business credit. The owner’s personal credit cards and lines of credit may be the only way to get the doors open. Even so, there are a number of reasons a company should strive to establish a separate business score, including:

  • A solid business credit history increases the chances of getting financing with more favorable interest rates and other terms.
  • Insurance rates are more expensive as the business grows; good business credit can help to keep rates lower.
  • Keeping business and personal finances separate is essential for tracking business expenses for tax records.
  • Good business credit increases borrowing power and the ability to get financing for larger purchases.
  • Taking on too much debt for business expenses might lower the personal credit score.

The expenses to start up a company add up very quickly. Initially, using personal credit to get the business off the ground might be a necessity because the owner has no other options. Eventually, building a good business credit score should become a priority in order for the company to build a strong business presence.

How Business Credit Scores are Calculated

The three major business credit bureaus are:

Equifax and Experian calculate credit scores for individuals as well as business. Dun & Bradstreet provides analytics and commercial credit data for businesses only. Dun & Bradstreet utilizes a nine digit DUNS (Data Universal Numbering System) identification number as a business identifier. Lenders and potential investors reference the number to determine the creditworthiness of a business. Below is a brief overview of the scoring methods of each of these credit bureaus.

Dun & Bradstreet: 

The credit risk of a company is measured by a Paydex score of zero to 100. The number is based upon reported payment history data. A combined commercial credit score and financial stress score determine whether lenders will extend credit. 

A commercial credit score is the predictor of delinquency with a range of 101 to 670 (the lower score means higher probability of a delinquency). The financial stress score is a predictor of the likelihood the business will fail within one year, meaning an unpaid loan was either settled or the company closes without full payment to creditors.

Experian:

Experian offers a comprehensive report from a database of over 27 million businesses called the CreditScore. The in-depth business credit score report includes not only scores, but facts about the business such as registrations, contact information, and insurance data to name a few items.

In addition to payment history, Experian calculates business scores using credit data from suppliers and lenders. Legal filings, business background information, and public information are also reflected in the score.

Equifax:

Equifax offers three types business credit assessments:

  • The payment index, which is the history of timely payments measured from zero to 100.
  • The credit risk (likelihood of severe payment delinquency measured from 101 to 992).
  • The business failure score, meaning the chances that a business will close within a period of 12 months.

The list of factors that bureaus consider when scoring business credit is exhaustive. However, all credit bureaus do consider issues like age of the oldest account, types of transactions, and credit utilization. 

Generally, small businesses are assigned medium-low risk of default, even if they have a good payment history. Well established companies with a history of good credit attain a low-risk rating faster and easier.

Checking a Business Credit Report

A business credit report should be examined on a regular basis to ensure the credit history is accurate. Since each credit bureau collects credit information differently, it is important to pull a report from each bureau. Although business credit bureaus claim to verify information, there can still be mistakes in the report which can be corrected by providing evidence to support the inaccuracy.

Business owners should check their credit reports at least once each year.

The report should be checked sooner if the owner will be applying for a small business loan or financing business equipment in the immediate future. Some bureaus also offer statistics that compare the credit rating of other businesses, which can be useful information for making financial decisions regarding business credit.

Improving a Business Credit Rating

There are proven benefits to having a business credit score for any size company. But what if a company has damaged its business credit score over a period of time? Just like personal credit, it is possible to improve a poor credit score. Some suggestions include:

Settle any legal suits over unpaid debt.

Ask vendors and suppliers to report timely payments to the credit bureaus.

Make sure that settled suits are removed from the credit report.

Keep written documentation of good credit references and make sure they are reported.

Above all else, accounts should be brought up to date and kept in current status. Business owners should not make payments late, and especially avoid missing an account payment for more than three months. Bouncing checks and going into collection status will also bring scores down to unacceptable levels. Working to build and maintain solid business credit is basically the same as personal credit, with matching rewards and advantages for the effort.

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Sheila Kay

Author

Sheila Kay is an author, ghostwriter and editor residing in the Atlanta, GA area. Among her favorite writing genres are creative nonfiction, self-improvement, and finances. Her first published book, PTSD and the Undefeated Me, is a memoir which has been a stepping stone to her involvement with mental health advocacy for military and civilian men and women. She is currently working on the first fiction novel to be published under her name. For more information or to purchase her books, visit Sheila’s Author Page on Amazon.com.

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