Strong business credit needs personal credit, too
By Dawn Papandrea
February 9, 2015
If you're a business owner looking to ramp up or expand and need access to credit in order to do so, you've got some work to do.
That's because lenders and vendors are selective when it comes to creditworthiness, and will look at a number of factors when deciding your borrowing fate. In fact, it will be up to you to build and maintain a strong credit profile on two fronts — your personal history and a separate business credit file.
Doing so is worth your time and effort as it will open up new opportunities to qualify for the best lending products as well as more favorable terms and interest rates.
The best of both credit worlds
As your business moves forward, it is important to establish separate business accounts as business income and credit history are looked at separately from personal credit history when applying for loans, explains Roby Schapira, Wells Fargo Small Business leader for the Southwest. “Your business credit profile is much more than just a numerical score or payment history,” says Schapira. “It is also a perspective of your business practices, banking relationships, and the way you present your financial history. In short, your credit profile is everything that a potential lender sees in you and your business.”
That being said, it's important not to let your personal credit habits fall by the wayside when you're focused on your business, says Jordan Peterson, credit product manager of PNC's Business Banking division. He points out that most institutions, including PNC, use a combination of information from the company owner's personal credit file as well as the business credit file when reviewing applications. “Banks and creditors do look at individual credit histories of owners who have 20 percent or more of the business,” he says.
“Building a credit profile is an active, ongoing process that requires careful management.”
–Roby Schapira, Wells Fargo
Here's why: Not only will you be expected to show that your business is thriving and has had a strong history of on-time payments to other lenders, but lending institutions will want to know a bit about you, too — the person behind the business.
“There is a correlation between the way an individual conducts himself personally and professionally,” says Mitchell D. Weiss, professor of finance at the University of Hartford and author of “Business Happens: A Practical Guide for Small Businesses and Professional Practices.”
“If the person's credit report looks like hell, I'll be hard pressed to believe he will have his act together professionally. Personal credit is a look inside the individual about how serious they are about their own personal finance,” he says.
Looking at credit history helps answer the question: “How has the borrower handled credit obligations?” says Schapira. “On the personal side, a lender will look at the business owner's history of credit management, including FICO score and details of their credit record. A lender also will want to know whether the business applying for credit has paid suppliers and other business obligations in a timely manner, including those to other financial institutions,” he explains.
The credit juggling act
As far as how to manage both, it's a matter of diligence. For starters, you need to stay on top of your personal credit file (as you hopefully have always done) by looking at your credit report once per year from each of the three credit bureaus, Experian, Equifax and Transunion. You can do so for free via AnnualCreditReport.com. Be sure to make any necessary corrections. Also, continue to pay bills on time and try not to utilize too much of your available credit — both of which are major factors in your FICO score.
On the business credit side, you'll have to be proactive in making sure your positive credit activity is reported, says Joel Pruis, senior business consultant with Experian.
“Business data is several years behind consumer data as far as its use for credit. Not all creditors report your business credit to the bureaus,” he says. It's up to you as the individual business owner to inquire when you establish an account if it will be reporting to the business credit bureaus, the major ones being Experian, Dun & Bradstreet and Equifax.
Similar to the consumer side, you'll want to check your business credit profiles for accuracy, and to see what's been reported, especially if you plan to apply for a loan in the near future.
Beyond keeping tabs on both credit files, it doesn't hurt to establish a relationship with the financial institution you want to work with. “A deep tenured business and personal credit and deposit relationship with a bank can make a difference,” says Schapira.
All in all, a strong credit profile isn't something you simply have or you don't. Says Schapira: “Building a credit profile is an active, ongoing process that requires careful management.”