As a business owner, it is important that you monitor and develop both your personal credit and your business credit. Both are important in telling lenders how creditworthy you and your business are.
Personal credit
Personal credit is tied to your individual financial activities and is linked to your social security number. Personal credit history is reported through 3 main credit reporting agencies: Experian, Equifax, and Trans Union. Credit scores range from 300 to 850; the higher the number, the better the credit risk you are to lenders. A credit score is given based on factors such as your payment history, the amount owed, new credit, length of credit history, credit mix (installment versus revolving), and credit card usage. Installment credit includes accounts like mortgages, auto loans, and student loans. Revolving credit includes accounts like credit cards, retail store cards, gas station cards, and lines of credit. The top two factors to determine your credit bureau score are your record of on-time payments or payment history and the amount of credit you’ve used. Payment history takes into account whether you have paid your accounts on time and also factors in previous bankruptcies, collections, chargeoffs, and delinquencies. The more payment issues you have in your history (especially recently) and any balances on open collections or chargeoffs, the lower your credit score will be. Here are a few other things that can lower your credit score:
- Too many new accounts (the longer your accounts have been open, the better)
- Having too many recent hard credit inquiries
- A large total amount of debt
- Having less than 50% availability on your revolving credit balances
- Not having enough credit history or not having a good mix of credit (installment credit and revolving credit)
If you are unsure of what your personal credit bureau is reporting, there are free agencies you can use to pull your credit report and work on correcting any issues.
Business credit
Business credit is tied to your business financial activities and is linked to your Employee Identification Number or EIN. Business credit can be reported through Experian and Equifax or through business-only reporting agencies such as Dun & Bradstreet and Paynet. Dun & Bradstreet will report a Paydex score which tells how you pay your trade credit suppliers. A Paydex score will range between 1 and 100; a higher number represents a greater likelihood that a business will pay its debts on time. Paynet (owned by Equifax) is becoming one of the most widely used business credit reports in the commercial finance industry. Paynet reports on your pay history of other business loans and leases. Paynet has a score called the PayNet MasterScore which takes into account your payment history, number of years in business, number of years of borrowing history, amount of recent debt, paydown on borrowings, size of amounts borrowed and other factors. The PayNet MasterScore ranges from 0 to 1,000 with higher scores indicating a lesser chance of default. These reports will also list any public records filed under your business such as bankruptcies, judgments, liens, and UCC filings. Your Paynet report will track inquiries similar to personal credit; too many recent inquiries could cause a decline as underwriters are concerned with the amount of debt a business is looking to take out. If a business has taken out a large amount of recent debt, this could also cause a decline or a request for financial statements to assure the business can cash flow the new debt obligations. As a newer business grows, it is important to start establishing business credit history. Having only strong personal credit is not enough as a business grows and starts to request higher dollar amount financing. Lenders are less likely to approve a large loan for a business that does not have any comparable business borrowing in their past.
Both business and personal credit play a crucial role in the success and growth of a business. A positive profile can lead to lower borrowing costs and less money out of pocket upfront. A limited or negative profile can hinder business growth, leading to higher borrowing costs, restricted terms, more money down, additional collateral requirements, or declined financing requests.
Let American Financial Partners help build your business credit by being your partner in commercial equipment financing. Call us today at 888-237-3533!
