Business credit serves a similar function to personal credit yet has a slightly different structure. Before reaching out to lenders for any form of financing, borrowers must understand their current financial situation both personally and for their company. This means reviewing key terms such as credit scores, cosigners, collateral, and credit repair. Lenders make decisions based on these factors.
Credit Scores
Both business and personal credit scores indicate the likelihood of repayment and affect overall purchasing power for borrowers. Scores and payment histories that are considered high risk may be denied funds or be subject to high interest rates.
Business credit scores are used by companies and government agencies to determine the financial status of individuals and businesses that seek financing and contracts. Dun & Bradstreet is one of the major providers of business-related credit reporting. This scoring system is used by both commercial and private banks and lenders. Depending on the structure of your business, an Employee Identification Number (EIN) is used in place of a social security number (sole proprietors use their SSN).
Dun & Bradstreet uses a 1-100 scoring scale called “PAYDEX” which is divided into the following three risk categories:
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- High risk – 0 to 49
- Moderate risk – 50 to 79
- Low risk – 80 to 100
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- Personal Credit Score
While building business credit can open new lending opportunities for your start up, personal credit history can still be a contributing factor in one’s ability to secure funding. This can be the case even if a company uses an EIN. This is especially true for new businesses that do not have established credit history. For example, some business credit card companies will still require personal credit information based on the applicant’s social security number. Also, if you need to purchase or lease property, a guarantee of personal credit may also be requested. Further, obtaining a loan from major banks and the Small Business Administration (SBA) also may require what is referred to as “good character,” meaning the applicant has a solid repayment history and excellent personal credit scores. Conversely however, business credit rarely has an impact on personal scores. Improve your Personal Credit Score.
Rating System
Personal credit is monitored through reporting companies such as Experian, Transunion, and Equifax. FICO Scores range from 300 – 850 and are broken down into 5 categories:
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- Poor: 300-579
- Fair: 580-669
- Good: 670-739
- Very Good: 740-799
- Exceptional: 800-850
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Cosigner
If you do not have the financial history or credit (either business or personal) to secure the loan or advance required to fund your needs, you may consider a cosigner. Typically, this is a business partner or person who has an interest or role in the company. This can help reduce interest rates because a second party offers additional assurance that the debt will be paid.
Collateral
Collateral is a form of asset-based financing that refers to a resource that carries value that can be used in the future to generate money. Collateral assets can include real estate, machinery, intellectual property, land, vehicles, accounts receivable, jewelry, money market accounts, etc. Collateral is generally used for short term needs and when other forms of funding are unavailable (like reaching limits with vendors or credit cards). Lending companies use collateral to offset risk. In the event the borrow is unable to meet the terms of a loan, the collateral is legally forfeited. Asset based financing is available from Lending4Biz for your short-term needs.
Credit Repair
For those without the required credit rating, cosigners, or collateral, credit repair may be necessary prior to securing the desired amount of funding. Although these steps take time, it is necessary to establish a strong financial history both personally and for your business.
Typically, when customer cannot qualify for a bank business loan it is due to poor FICO score or Business Credit. In this case we do not abandon you like other lenders and instead explore every option available to get your business financed along with working with you on repairing your credit. In the meantime, there are steps you can take to improve your credit scores
Business:
- Make sure you have an (EIN) from the This number will be required on financial documents.
- Once you have an EIN, obtain a business checking account, separate from your personal accounts (This will help prevent commingling funds)
- Register with Dun & Bradstreet so you can be issued what is called a “DUNS number” (an identifying number unique to your business, similar to an EIN or SS number). Note: Equifax and Experian also collect business credit information, so you will want to monitor these as well
- Take advantage of vendor accounts that report to credit agencies
Personal:
- Monitor your credit scores on a regular basis to ensure accuracy
- Consider obtaining a secured credit card
- Apply for low limit loans and credit cards and slowly request increases
- Pay on time and avoid overextending accounts
- Maintain a balance less than 30%
- Limit hard inquiry requests