Published By Janet Gershen-Siegel at September 21, 2017
Creditworthiness is a lender calculation which determines the possibility a borrower might default on debt obligations. It considers several different factors – here are five critical ones.
Because your business credit score is a kind of shorthand look into your business’s solvency, banks and other lenders take it seriously. Your business credit scores will start off low, because you will have very little in the way of credit history. As a result, lenders will often take a look at your personal credit scores. Therefore, if your personal credit scores are good, a lender will be more inclined to give your small business favorable terms. If your personal credit scores are not so good, then your small business will not get such favorable lending terms. Or your company might not get a loan at all.
Late payments are going to affect your business credit score for a good seven years. If you change and improve your payment history, it has a definite impact. So pay your business (and personal) debts off, as quickly as possible and as completely as possible. You can make a very real difference when it comes to your credit scores. Always make sure to pay on time and you will reap the rewards of punctuality.
How long has your company has been using business credit? By definition, newer businesses will have short credit histories. If your business’s credit history is short, do not despair. Credit reporting bureaus will also take a look at your personal credit score and your own personal history of payments. If they determine that your personal credit is good, and in particular if you have a fairly long credit history, then your personal credit can essentially come to the rescue of your corporate. Therefore, you should not have gotten your first credit card last week.
Naturally, the opposite is also true – if your personal credit history is not so hot, then it will negatively affect your corporate credit scores. And it will do so until your business and personal credit can be separated.
Building on the last point, consider your own personal credit history and behavior. If you are having a bad business year, it could conceivably end up on your personal credit score. Hence if your business has not been around for too terribly long, this will directly affect your corporate credit.
However, there are some things you can do. You can take steps to unlink the two by working to separate them. For example, if you get credit cards only for your small business, or you open up business checking accounts and other bank accounts (or even get an unsecured business loan), then the credit reporting bureaus will begin to treat your personal and corporate credit as separate matters.
In addition, make sure to incorporate, or at least file a DBA (doing business as) status. Also, you can pay your company’s bills with your company credit card or business checking account. Plus, make sure it’s the business’s name on the bill and not your own.
A personal or business credit utilization rate just means the amount of money you have on credit as divided by total available credit. Lenders generally do not want to see this go above 30% (therefore, for each $100 in credit, do not borrow on more than $30 of that). If this percentage is going up, then you will need to spend down and pay off your debts before trying to borrow more.
Good business and personal credit behaviors show how responsible you are – and lenders love to see that.