How banks determine your business credit worthiness

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How banks determine your business credit worthiness

Published By Janet Gershen-Siegel at September 29, 2017

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Banks are in the business of judging your company’s creditworthiness has a direct relationship to five important issues. Ignore these at your peril!

1. Your Personal Credit can Affect Your Corporate Credit

Have you been having a bad year when it comes to finances? Then it could wind up on your personal credit score. And if your business has not been around for too long, your bad year will also directly affect your corporate credit. However, you can unlink the two by taking steps to separate them.

For example, if you get credit cards only for your business, or you open up business checking accounts and other bank accounts (or even get a business loan), then the credit reporting bureaus will start to treat your personal and corporate credit individually. In addition, be sure to incorporate, or at least file a DBA (doing business as) status. You can also settle your company’s bills with your company credit card or checking account, and make certain it is the business’s name on the bill and not your own.

2. Credit History Length Matters

This is basically how long your company has been using business credit. Of course newer businesses will have short credit histories. While there is not too much you can specifically do about that, don’t panic! Credit reporting bureaus will also look at your personal credit score and your own history of payments. If your personal credit is good, and in particular if you have a reasonably lengthy credit history (that is, you did not just get your first credit card last week), then your personal credit can come to the rescue of your corporate.

Naturally the inverse is also true– in the event that your personal credit history is poor, then it will have an effect on your corporate credit scores until you can effectively split your business and personal credit.

3. Your Payment History is Important

Tardy payments will affect your business credit rating for a good seven years. If you pay your company (and personal) financial obligations off, as quickly as possible and as completely as possible, then you can make a very real difference when it comes to your credit scores. Make sure to pay on time and you will always enjoy the benefits of promptness.

4. Your Credit Utilization Rate is a Factor

Your credit utilization rate just means the amount of cash you have on credit as divided by your total available credit. Lenders in general don’t want to see this go above 30% (therefore, for every $100 in credit, don’t borrow on more than $30 of that). If this percentage is increasing, you willhave to spend down and pay off your debts before borrowing more.

5. The Credit Reporting Bureaus Can Get it Wrong

Much like each entity out there, credit reporting bureaus like Equifax and Experian are only as good as their data. If your company’s name is similar to another’s, or your name is a lot like another business owner’s, there can potentially be some mistakes. So monitor those reports, and your business report at Dun & Bradstreet, PAYDEX.

Stay on top of these reports and dispute charges with documentation and clear communications. Do not just let them stay wrong! Take action and fix this! And you should also be monitoring the credit reporting bureau which solely handles personal and not corporate credit, TransUnion. If you don’t know how to pull a credit report, don’t worry. It’s easy.

As soon as you know what affects creditworthiness, the closer you are to getting a business loan from a bank.

One thought on How banks determine your business credit worthiness

  • Mark Andrews says:

    These five points are very similar to how your personal credit score is determined. It sounds like having a good grasp on personal credit will go a long way towards business credit.

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1 Comment

  1. Mark Andrews says:

    These five points are very similar to how your personal credit score is determined. It sounds like having a good grasp on personal credit will go a long way towards business credit.

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