Build Your Small Business Credit

Four key differences that matter

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Build Your Small Business Credit

Build Your Small Business CreditAs individuals we spend years establishing, managing and protecting our good personal credit ratings. With strong personal credit, access to favorable interest rates and terms when applying for credit and financing may be available.

When you have the ability to obtain financing at the best available bank rates for items such as a new automobile, home, or investment property, you have established a strong personal credit asset.

As a business owner, having good personal credit ratings provide leverage to potentially qualify for various types of business funding. However, using personal credit alone does not enable a business owner to maximize the company’s true financing potential.

When you build your small business credit; the business itself establishes its own unique credit identity with the business credit reporting agencies. With an established business credit file; banks, suppliers, vendors, retailers and other businesses will be able to assess your company’s creditworthiness rather than rely on personal credit alone.

Here are the four key differences between small business credit and personal credit:

Credit Checks

When you apply for personal financing you provide your social security number on credit applications. This is the information a bank uses to trigger an inquiry with a consumer credit agency in order to review your personal credit report.

With business credit, your company provides an Employer Identification Number or D-U-N-S number on credit applications in order for banks, vendors or suppliers to check your business credit reports.

Credit Identity

As an individual you have the ability to establish only one credit identity that is tied to your social security number.

As a business you have the unique ability to create a business credit identity for each business you own.  Since each business entity is assigned its own Employer Identification Number, it can also establish its own individual business credit file and score.

Credit Capacity

Your personal credit worthiness is based on your ability to pay your financial obligations such as credit cards, student loans, auto loans, mortgages etc. Your personal credit capacity is impacted by many variables. These are including but not limited to debt-to-income ratio, new credit, payment history, credit utilization, credit limits and inquiries.

With small business credit; a company’s credit capacity is based on factors such as company revenues, years in business, tangible and intangible assets, credit card transactions, payment history, industry classification, credit limits, inquiries and a host of others.

Credit Ratings

The most popular credit scoring system used for personal credit are FICO scores. According to Fair Isaac, 90 percent of “top” U.S. lenders use FICO scores.

However, with business credit there is no single uniform risk assessment model in use by banks, suppliers, vendors and retailers. Instead, various risk assessment tools and scoring systems are. These include FICO SBSS, Paydex, Intelliscore and the Small Business Credit Risk Score.

As you can see there are major differences between business credit and personal credit. As a business owner it’s vital to invest the time in building your small business credit. Ultimately, a strong business credit report and score will enable a company to acquire credit and financing based on its own creditworthiness with favorable rates and terms.

Marco Carbajo is a guest SBA blogger, business credit expert, author, speaker, and founder of the Business Credit Insiders Circle. He is a business credit blogger for Dun and Bradstreet Credibility Corp, the SBA.gov Community, About.com and All Business.com. His articles and blog; Business Credit Blogger.com, have been featured in 'Fox Small Business,' 'American Express Small Business,' 'Business Week,' 'The Washington Post,' 'The New York Times,' 'The San Francisco Tribune,' ‘Alltop’ and ‘Entrepreneur Connect.’

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