Category Archives for Business Credit Builder
Differences between Personal and Business Credit Scores
There are many differences between consumer credit and business credit
There are many differences between personal and business credit scores.
One fundamental difference between consumer and business scores is the time frame the scores gauge someone’s risk of default over.
A business credit score is a mathematical model that is used to depict a business’s risk of going 90 days late on an account within the next 12 months.
A consumer credit score is a mathematical model that is used to depict a consumer’s risk of going 90 days late on an account within the next 24 months.
Another big difference between consumer and business credit scores is what the score actually represents.
A consumer credit score reflects an individual’s likelihood of defaulting on an obligation.
A business credit score reflects the business’s likelihood of defaulting on an obligation, not the business owner’s.
The business credit score is based on how the business obligations are being paid, not how the business owners pays their personal obligations.
Another major difference between business and consumer credit scores is the score range.
Consumer FICO scores range from 350-850 with 850 being the best score you can obtain. Business credit scores typically range from 0-100 with 100 being the best score you can obtain.
These are three of many major differences between consumer and business credit scoring.
The 5 Cs of Business Credit
The 5 C's of Business Credit
The 5 Cs of business credit are:
- Character
- Capital
- Capacity
- Collateral
- Conditions
Character is all about you. It’s about your personal history, your stability, and how reliable you are. This variable is more subjective than the others, and is one of several reasons it is beneficial to do business with a bank where you have built relationships with the people who work there. In determining your character, the lender may look at your education, your work history, your personal income, and personal credit history. Again, it’s important to remember that this is one area of business credit where relationships do matter!
Capital is about how much you have invested in your business. Whether you are seeking a bank loan or a loan from a private investor, the lender will want to see that you are heavily invested in your own business. Generally speaking, the more of your personal money that you’ve invested in your business, the better it will look to a potential lender. (After all, if you’re not confident enough to invest in your business, why should they be?)
Capacity is about your ability to repay a loan according to the terms. Things like cash flow, payment history, and the assets and resources of any person providing a personal guarantee will play a part in determining your capacity to pay back a loan.
Collateral is something offered up as security for a loan. Anything from equipment to inventory to a home you own can be considered collateral. It may be easier to get approved for loans with collateral, and many loans will require it. In some cases, the more that you can offer as collateral, the more likely you will be to get approved.
“Conditions” may mean any number of things, some of which could be out of your control. The current economy, for instance, may play a role in your ability to get approved for a loan. Other things that they may look at include your industry and its economical status, and the purpose of the loan.
If your industry is suffering and businesses in your industry are struggling, it could negatively affect your ability to get approved. Some loan purposes are more readily approved than others, too. Loans for riskier purposes such as new and unproven expansions are generally less likely to be approved.
Has Your Business Been Denied Credit?
Have you been declined for business credit?
According to recent reports, as many as one third of applications for business loans are denied. If you find yourself as part of that group, there are some things you can do to help the situation.
The first thing you need to do is try to determine where the problem is. Possible areas of concern may include:
- Your business profits. Does your business have a healthy profit margin? Improving your profits by reducing and trimming down the operational excess and unnecessary business spending can help improve profits and boost your chances of getting approved.
- Your business assets and liabilities. If your balance sheet is out of whack, most lenders will run the other way. If your business is already heavy on debt, then this will be an area of concern that you’ll want to address.
- Your payment histories and business credit profile. Obviously, how you are paying your existing obligations will play a role in your approval or denial for credit. If you’ve been denied business credit recently, check your Paydex and other payment performance data and make adjustments as necessary.
- Most payment experience data is only reported for 2 to 3 years (depending
on the credit bureau), so if you’ve made a mistake or hit a bump or two in the road, don’t let it worry you. Just keep the positive payment history building, and make sure what is being reported to date is accurate.
- Your bank ratings. If your business bank account balances are habitually low, this can actually rule you out for certain types of business credit. Try to maintain $10,000 or more in your business bank accounts to avoid trouble.
The bottom line, if you’ve been denied credit, is that there is something about your business that makes it appear to be a bad risk.
Your job is to analyze and understand your business credit report and business finances, determine where the problem is, and take the necessary steps to correct your course.
Sometimes the lack of history or data on your business will be a key factor in a credit denial.
This is something that can be easily remedied by taking careful steps to shape your business’s financial picture and credit profile.
5 Factors That Affect Your Business Credit
What makes up your business credit score? What gives you the best chances of getting a loan?
Here are a few factors that play into your business credit picture and what you can do to make the most of them:
- Payment History – Your payment history is an important part of your business credit profile. It is what your D&B Paydex score is based on. Many credit opportunities come with a minimum Paydex requirement.What you can do: Always pay vendors EARLY. On time is “okay”, but paying early (as in before you receive the invoice) is best.
- Credit Applications – Believe it or not, multiple applications for credit can be a red flag that will keep you from getting approved for a loan. Too many in a short period of time will make your company look desperate and be a sign to potential lenders that things are going downhill.What you can do: Plan your use of credit accordingly, and keep applications to the minimum necessary to accomplish your goals.
- Blanket UCC Filings – One thing that many people don’t realize is that they need to pay attention to the order in which they get certain types of loans, and what UCC filings the lenders will file. Some lenders may file a “blanket” UCC filing, which essentially says they have an interest in ALL of your assets. These blanket UCC filings will then take precedence over any subsequent ones, which drastically reduces your ability to get credit elsewhere.What you can do: Plan your credit carefully, and negotiate UCC filings according to what your needs are. For example, if you need particular assets excluded from a UCC filing to use as security for another loan, explain that fact in advance to get those items excluded from any blanket filings, or, alternatively, get the loan or account with the more specific UCC filing first. Some experts recommend opening accounts with competing UCC filings at the same time, and negotiating the details with each party simultaneously.
- Company Financials – With D&B, it’s important to make sure your financials in your credit file are up to date. If they are not, it could negatively reflect on your company when the lender is comparing the available data.What you can do: Update your financials on your credit reports so that they reflect your current circumstances, and plan to do so periodically.
- Company Legal Structure – The legal structure of your company (LLC versus INC versus Partnership, etc.) can also affect your business credit. Lenders are less likely to loan money to Sole Proprietorships and Partnerships than Corporations or Limited Liability Companies.What you can do: If you aren’t incorporated, you should be. The advantages span far past just your ability to get credit.
There are other factors that affect your ability to get credit, such as the amount of debt you already have, how heavily invested you are in your company, and even your personal credit can play a role in your approval or denial.
Here we’ve covered five of them. In the end, the better the all-around picture you can paint, the better your chances of getting approved for loans will be.