Merchant Capital

Understanding The Difference Between Personal And Business Credit

While personal and business credit seem similar on the surface, they are actually quite different. Here are the fundamentals you need to know in order to really understand the difference. This is vital in accessing credit on both a personal and professional capacity down the line.

So what is a personal and business credit score?

A personal credit score relates to your personal financial history and shows how consistent you are with your personal finances. This in turn tells lenders whether they can trust you with paying bills timeously which will then help you qualify for financial products like personal car loans, credit cards and bonds.

A business credit score differs in that it is directly linked to your business’s financial history. The purpose of this credit score is to show if your business is a good candidate to loan cash or do business with. It  demonstrates to lenders that you will likely pay on time. This then assists you with showing you’re in good standing for future lines of credit, trade credit, business loans and cash advances. It also ensures that you are able secure low-rate business loans and get better repayment terms.

What do personal and business credit scores look like?

Personal credit scores usually range between 330 and 850 and are calculated by various credit bureaus. If your score is high, then you are considered a lower risk to financial institutions. A business credit score is typically between 400 and 760. The higher this number, the less risky you are considered.

How does your business score calculation work?

This comes together based on a number of factors including whether you make payments on time (namely within agreed time frames). It also includes trade references as well as bankruptcy and judgments that are filed in your businesses name. These can negatively affect your credit score. This is why it is so crucial that you review your credit score on a regular basis. Familiarising yourself with this will help you pick up errors, avoid future slips and put measures in place to get your business in better standing.

Here are the key influences on a business’s credit score:

  • Company details: Namely the type of entity and length of operation

  • Principal details: This considers the backgrounds of directors, members and partners which can have both a positive and negative effect on the overall business interests.

  • Ownership: Percentage share of individual shareholders. This may also include holding company activities, office locations and staff complement.

  • Trade references: Here your organisation’s suppliers provide references pertaining to work relationship history, trade volume and experience in general.

  • Financial info: This is overall information demonstrating a bigger picture of business operations.

  • Bank code: This is provided by the bank to confirm the current financial status of your business bank account.

  • Adverse info: This high-weighted category looks to prior adverse data as an indicator of future behaviour.

Once all the above factors have been considered, the business will be rewarded a credit score.

The bottom line

Business and personal credit scores provide really important aggregated information that helps interested parties understand how trustworthy and investable you are in either your personal or business capacity. So it is really crucial that as a business owner you pay  careful attention to your ratings, pay on time and maintain good relationships with suppliers. This will ensure that when the time comes to apply for finance, you will be in good standing and get quick access to the crucial funding you need for your business.

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