Why Good Personal Credit is the First Step to Building Business Credit

If you’re like many new small business owners, you might not realize how important your personal credit is to getting you a small business loan. Learn why good personal credit is so important to future business credit—and how to polish yours.

Why Business Lenders Look at Your Personal Credit Score

Lenders make their underwriting decisions based on the risk of a borrower not paying back the money received. To assess this risk, lenders study each borrower’s past credit and repayment behavior—which gets reflected in their credit scores. But when the borrower wants money for a new business, there’s little or no past business credit behavior to evaluate, and no business credit score to review yet.

Since entrepreneurs and new business owners are typically very invested in launching their business, lenders instead look at individual credit scores and credit reports to gauge credit risk. The stronger your personal credit, the more likely you’ll receive an approval for your first business credit. Even better, your repayment terms and interest rates will likely be more favorable than they would if your credit was poor. In fact, bad credit will probably prevent you from getting the business loan you want at all.

Your Recorded Credit Behavior Impacts Your Personal Credit Scores

When you apply for a business loan, lenders gather as much information about your finances as they can—including your financial projections, business plan, and credit score. Your score is based on a credit report from one of the three primary credit reporting agencies: Experian, TransUnion, and Equifax.

Your credit report includes information on your current credit accounts and those you’ve had in the past, like mortgages, loans, credit lines, and credit cards. It also shows your repayment history—how often your payments are on time, a little late, or very late—and your credit utilization, or how much of your available credit you’re actually using.

All this information contributes to  your personal credit score. Lenders use this number to make their credit decision on whether to grant you a business loan, what interest rate to charge, and what repayment terms to include. That’s why it’s important to know what’s on each of your credit reports and which credit reporting agency and score your lender will look at.

It’s also important to note that credit scores can differ between the credit reporting agencies, and even within one credit reporting agencies. This is in part because there are multiple versions of some credit scores.

You might be able to see your FICO scores for free through your bank or credit card company, too.

Review Your Credit Report

Before applying for your first business loan, make sure to order your credit report to check for accuracy and see what lenders may see. This also gives you the opportunity to address any credit reporting errors, make sure the information is up-to-date, and note areas that you need to work on.

Knowing the state of your personal credit before you start applying for business credit can also help you identify which lenders to try. And you should be choosy, because applying to multiple lenders could have a negative impact on your credit.

Don’t forget to order your credit report for free. Federal law lets you order your own personal credit report every 12 months from each of the three main credit reporting agencies.

Strengthen Your Personal Credit Now

Once you know your credit scores and you’ve reviewed your personal credit reports, it’s time to clean up your credit as much as possible.

1. Get serious about curbing your credit card spending. The key here is to reduce your credit utilization, which means “don’t use up all of your available credit card and credit line credit.” Know how much you owe and the limits on each of your accounts. Paying your balance down as much as possible so it’s not creeping up towards the limit could have a positive impact on your FICO score.

2. Don’t close your older open credit card accounts—they show that you have a long track record of responsible credit repayment. Keep them open, and use them from time to time.

3. Make all of your payments in full and on time. This includes mortgage or rent payments, credit card, loan, credit line, and utility bills.

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To build solid business credit, the first step is to have a strong  personal credit record. But you don’t want to operate your business on the back of your personal credit score.—once you get approved for a business credit card or business loan, it’s important to keep your personal and business credit and finances separate.

The post Why Good Personal Credit is the First Step to Building Business Credit appeared first on Fundera Ledger.

from Fundera Ledger https://www.fundera.com/blog/2016/04/07/personal-credit-building-business-credit/