Starting a business takes money, and that money typically comes from financing. But in order to get approved for a business loan, entrepreneurs need to meet certain lending criteria, including having decent credit. Lenders will not only look at your personal credit score but also your business credit, both of which play a role in your ability to obtain financing for your business.
But how exactly does business credit and personal credit differ? Let’s dive into each to understand the difference.
Business credit – also referred to as commercial credit – helps lenders to determine your creditworthiness and candidacy for financing. A high business credit score can boost the odds of securing a business loan and obtaining better favorable terms. On the other hand, a low business credit score can make it more difficult to obtain financing and secure more favourable terms.
Not only do lenders look at our credit score, but so do vendors and suppliers before agreeing to deal with your company. Business credit is also required to obtain business insurance, and in many cases, it’s also needed for purchasing goods and services.
While your personal credit may be able to be used for some of these, in many cases it can’t. And even in cases where personal credit may be used, it really shouldn’t, as using personal accounts can make accounting a lot more confusing and difficult.
Who Creates Your Business Credit Score
There are three major credit bureaus in Canada that are responsible for determining business credit scores: TransUnion, Equifax, Dun & Bradstreet. Each of them uses a set of factors to determine a business credit score.
TransUnion offers both business credit reports and business credit scores. TransUnion uses business credit data and public record information to create their business risk score. This score takes into consideration a number of factors, including insolvencies or delinquencies, available credit limits, business bank accounts, credit cards, and collection.
Equifax works a little differently than other credit bureaus in that it assigns a business three different scores. The first is a conventional credit risk score between 100 to 992, which assesses a company’s credit history. The second report from Equifax contains a “Payment Index” range from 0 to 100, which is a measure of payment history to past creditors. A score of at least 90 means that a business pay their bills on time, on average. Thirdly, Equifax’s “Business Failure Score” ranges from 1,000 to 1,880 and assesses the risk of businesses dissolving.
Dun & Bradstreet
The Dun & Bradstreet PAYDEX score is a rather straightforward business credit scoring model that’s based on how promptly payments are made and is scored up to 100. This credit score assesses the average number of days needed to pay off a debt. A score of 100 means that bills have been paid at least 30 days or more before they’re due, on average. Scores of 80 mean that bills are being paid the day they’re due, on average. Generally speaking, the longer it takes for you to pay your bills, the lower your score will be.
Personal credit scores are used by lenders to assess a borrower’s creditworthiness and financial health. These scores represent numerical expressions that are based on an assessment of a person’s credit information.
Lenders use credit scores to assess whether or not consumers are able to qualify for a loan, the interest rate charged, and potentially even the loan amount. Missing bill payments and taking out too many loans can bring a credit score down, which can make it more difficult for a borrower to secure a loan.
A high credit score, on the other hand, means the individual has been much more responsible with his or her finances. Payments are typically made on time, credit limits are not maxed out, and debt loads are relatively healthy.
In Canada, personal credit scores range from 300 to 900. The closer the score is to the upper level, the better. Generally speaking, lenders like to see a score of at least 650 to 680 before they agree to extend a loan to an individual.
Who Creates Your Personal Credit Score?
In Canada, there are two major credit bureaus, Equifax and TransUnion. These bureaus compile the information found in your credit file to calculate your credit scores.
Certain factors are used to calculate a credit score, including:
- Payment history – A history of timely payments will help increase your credit score, while a history of missing payments will do the opposite.
- Debt load – The amount of debt you carry relative to your income will impact your credit score. Higher debt loads are often associated with lower credit scores, while lighter debt loads are typically associated with higher scores.
- Credit utilization ratio – The amount of money that you spend relative to your credit limit will be a factor in your credit score calculation. It’s generally recommended to keep your spending to no more than 30% of your credit limit in order to keep your credit score healthy.
- Age of your credit accounts – Older credit accounts are usually a good thing for credit scores, especially if they’re in good standing. Further, a longer credit history will help credit bureaus better assess your credit health.
- Credit mix – Having a few different credit accounts – such as a mortgage, personal loan, car loan, and credit card – can be a good thing for your credit score, as long as you are responsible with all bill payments associated with each.
How to Establish Business Credit
In addition to keeping all of your business finances separate from your personal finances, there are other ways to establish business credit:
Open a separate business account – As already mentioned, mixing your personal and business finances can make things more cumbersome. Not only will a separate business checking account make things easier for bookkeeping purposes, but it can also help you build business credit when you use it strictly for business expenses.
Apply for a business credit card – Using a business credit card responsibly can help you build good credit, much like using a personal credit card responsibly can have the same effect. With each timely payment you make, your business credit can be improved.
Apply for a small loan – Every payment you make will be reported to the credit bureaus, which can help you build good credit.
Establish credit lines with suppliers and vendors – Since Dun & Bradstreet needs a minimum of four vendors to generate its credit report, it would help to establish credit lines with suppliers and vendors and build up relationships so they can eventually turn into future trade references for your business when you apply for a business loan.
Regularly keep tabs on your business credit – It doesn’t take long for your business credit to change, so it’s important to keep an eye on it on a regular basis. By identifying any changes in your business credit report, you’ll be able to spot any strange issues that you can deal with right away before they negatively impact your credit rating.
Should You Ever Mix Business and Personal Credit?
While we don’t recommend using your business credit card to pay for personal expenditures, your personal credit score plays a key role in your business. Having said that, lenders are still going to look at your personal credit score if your business is relatively new and will require a personal guarantee when applying for financing, which means you’re still responsible for the loan. If you ever default on your business loan, the lender has some more recourse aside from going after your business.
It’s important to still maintain your personal credit score while you’re building your business credit since they can both be important when applying for a business loan.
Guest Post: About the Author
Loans Canada is a financial technology and media company that connects Canadian consumers to financial service providers and educational resources. Loans Canada is one of the nation’s leading online destinations for information on loans, debt relief, credit building, and commercial financing. Their technology platform allows consumers to search for the best lenders and credit providers in Canada.