Your credit score is an important part of your quantifiable identity as a businessperson. As far as the numerical factors that influence most lenders’ decisions as to whether or not they may provide funding for a given business, both the personal credit score and the business credit score associated with a given small business are among the easiest to obtain and some of the most telling about management and financial health over the lifetime of that enterprise. Read on to learn more about assessing and improving both your personal and business credit score in the event that you wish to apply for a Merchant Advance or loan.
Putting Your Best Foot Forward: Personal Credit Score
I have to give, ahem, credit for a fine definition of the major building blocks of the personal credit score to a fellow blog, this one at Canada Business Network (run by our very own Canadian government in this case!)
A credit rating is a snapshot of your financial track record which shows:
- How dependable you are at managing credit
- If you pay your bills on time or miss any payments
- If you have declared bankruptcy (this information remains on your file for 6 to 7 years)
- How often and which companies have inquired about your credit history
In this sense, the personal credit score can act as the first impression of your business history. It speaks to your general level of adherence to good practices in managing your personal and business finances.
In Canada, personal credit scores range from 300 to 900. The points you have accrued on this score will form a general indicator that lenders can use to understand your likely ability to remain accountable to any loans or advances made in your name. Your score can be checked online for a nominal fee: one major institution devoted to providing consumer credit information is Equifax Canada. However, the information provided by a personal credit report goes beyond the score. Understanding the context of particular inquiries and items on your credit history over time may provide more basis for lenders to infer about how your business has done in the past.
The Bigger Picture: Business Credit Score
Business credit is more volatile than personal credit, principally because the granting of commercial credit is driven by ever-changing market conditions. A business credit score provides a snapshot of the financial health of any given company at a certain moment in time that is separate from the owners’ personal credit history. It is reported on a 0-100 scale.
In this context, it makes sense to keep tabs on the health of your business credit score as an alternative method of representation to lenders. It also helps avoid overly frequent inquiries into your personal credit. Business scoring is influenced by factors that, at first, appear fairly similar to that of a personal score, but are in fact designed to take other more specific information into account about the operation of a particular business.
- Data gathered from vendors about your payment history, including cash flow, returned cheques, working capital, net worth and financial resources.
- The company’s business reports and corporate filings.
- Any third-party collection claims, legal suits and judgments.
- Data gathered from your business through interviews and investigations.
Your relationships with vendors and suppliers will have a strong effect on your business credit score. Building excellent relationships with these partners, as well as with other entities like the management company or landlord that oversees the property on which your business is located, can go a long way to helping your business credit rating.
It stands to reason that your personal credit history is probably lengthier than that of your small business. As such, you have to work to establish a business credit history that will help lenders get the bigger picture – and, in the long run, avoiding carrying business-related balanced on your personal credit will only help the health of the latter in the long run. You can do things like:
- Applying for business credit cards
- Incorporating your business
- Self-reporting to credit bureaus
- Verifying the accuracy of information about your business as displayed by credit reports
By understanding and making use of the information provided by both personal and business credit reports, you can construct a financial portrait of yourself and your small business that will help lenders understand and appreciate the work you have done in the past, how your business is doing in the present, and how future lending may work for you.