“The Nav American Dream Gap Survey, 2015, revealed of small business owners surveyed, 45 percent did not know they have a business credit score, 72 percent did not know where to find information on their business credit score and 82 percent didn’t know how to interpret their score,” reports the U.S. Small Business Administration.
Despite the important role business and personal credit play in owning a business, many business owners aren’t aware of the credit factors that influence their businesses. These factors can make or break the future of a business: their ability to grow, receive funding, acquire partners, etc.
Take a look at what exactly makes up a credit score, the difference between personal and business credit, and what your business can do in order to maintain good personal and business credit. Nothing brings peace of mind like knowing you’re actively improving the financial security of your business.
What makes up a credit score?
Most people know what happens if they have bad credit, and most people know late payments damage credit, but many people have no idea what makes up a credit score.
Get ahead of the game by paying attention to each component of your credit score:
- 35% is payment history
- 30% is outstanding debt (credit utilization): how many car loans, auto loans, mortgages, etc. do you have, how much of your credit card balances are you using, etc.
- 15% is the length of time you’ve had credit
- 10% is new credit, including completing hard credit inquiries or applying for new credit cards (the less, the better)
- 10% is having a good credit mixture: having a variety of credit, perhaps in the form of revolving lines of credit, car loans, mortgages, etc.
What’s the difference between personal and business credit?
While your personal credit score (based on a 300-850 scale) measures the creditworthiness of you as an individual, a business credit score (based on a 0 to 100 scale) measures the creditworthiness of your company. You build business credit by purchasing things for your business through business lines of credit, whether those be business loans or credit cards.
Entrepreneur.com explains that “Unfortunately, because the information provided to the business credit bureaus is sent in voluntarily—no business is required to send it in—the credit bureaus may never receive all or even any information about your business credit transactions. In fact, you could go for years racking up business credit without any of it being reported to the credit bureaus.” As a result, try to do business with companies that that do report payment history to business credit bureaus.
For more information on how to formally set up your business credit, click here.
Encourage top-level employees to maintain good personal credit. If something went wrong for your company’s financials, or if you wanted excess funding to grow, you can utilize that personal credit to receive funding (via lines of credit) and keep your business afloat until finances become steady again.
How can business owners keep their credit score high?
Here are some solid principles to practice that will benefit both your personal and business credit:
- Set up automatic payments: late payments are one of the easiest things to prevent and most detrimental mistakes to your credit score.
- Keep your credit utilization below 50%, even better if it’s below 35%.
- Have a variety of credit, including both revolving lines of credit and installment loans.
- Don’t close credit cards: take the time to pay them off until the balance is below 50%. The longer you have these credit cards open, the more your credit benefits.
- Begin buying things for your growing business through your business lines of credit rather than personal so that you can build your business credit.
- Avoid hard credit inquiries when possible by having a game plan. Shopping around randomly for credit opportunities can sabotage your ability to acquire lines of credit or loans.
- Check your credit report in order to eliminate potential errors that could be damaging your credit.
- Pay credit cards and loans in full.
Managing personal and business credit can be key to your company’s future financial success. Take precautions now to maintain good credit for the future.