By David Yanagisawa, Executive Vice President and Chief Lending Officer
As the Chief Lending Officer at Lakeland Bank , I see many north Jersey residents and small business owners apply for loans to help make their dreams come true.
Small business owners often ask me about how to maintain good credit and specifically to explain the difference between personal and business credit scores. Since the majority of lenders reference both business and personal credit scores when making lending decisions for small businesses, I thought business credit would be a good topic to share on our blog.
Most importantly, business and personal credit reports and credit scores differ. Personal credit scores range from 300
with a score of above 700
considered very good. Business credit scores, on the other hand, range on a scale from 0 to 100 with 75 or more considered an excellent rating although some reporting agencies use a different scale. The common denominator is that both provide lenders with a quick view of risk potential based on where the score falls on the credit scale.
Here is some background to help you establish good business credit.
Information about business credit transactions is gathered by business credit bureaus to create your business credit report using your business name, address and federal tax identification number (FIN)
. Three of the most popular business credit bureaus are:
Lenders use this report to obtain a current, objective picture of how a business manages its financial obligations. The business credit report shows similar information that is found in a personal credit report, such as comprehensive financial information and credit risk factors, but it is specific to a business's debt repayment and public records. Business credit reports will also include information about bankruptcies, judgments or tax liens. Demographic information such as business size, and names of owners and officers may also be included. In many cases, lenders will rely on your business credit report to determine how much credit they are willing to give.
One of the easiest ways for a business to build business credit is through vendor credit lines or trade credit. The primary benefit of vendor credit is the ability to defer the payment of cash that can be invested in the business. A secondary benefit is that these business relationships are reported to the business credit agencies. Paying vendor obligations within agreed credit terms proves to lenders that your business manages its debt and is credit worthy. Payment histories and testimonials from vendors help build business credit which can be used to obtain traditional business loans and credit lines from banks and other financial institutions.
Employing various lines of credit can be an integral part of running your business. As a small business owner interested in establishing business credit, look to smaller, local banks. At big banks, a small business owner may be just a number. At smaller banks, a lender will sit down and discuss details with you and look favorably on those who can demonstrate demand for their products.
To establish a business credit score and develop a positive commercial credit history, begin by following these simple steps:
- Apply for a free D-U-N-S number from the largest business rating bureau Dun & Bradstreet. It’s the fastest way to get added to the D&B business database.
- Apply for a business line of credit with a vendor using your tax identification number (FIN) and D-U-N-S number.
- Always make payments on time.
- Request that your existing vendors report your account history to business credit bureaus, as it is voluntary for them to do so. Many office supply companies such as Uline.com, NEBS.com and Viking.com report account history automatically.
Why Personal Credit Matters
As a sole proprietor or a business owner with fewer than 20 employees, your personal and business credit scores are closely linked in the eyes of banks and other lenders. Because of this, it’s important to take steps to protect both. You should monitor, evaluate and protect your credit standing just as you would protect any other business or personal assets. You will benefit greatly from having a good credit score and from having solid credit history. A business owner's personal-credit score shows they have what it takes to grow credit over a period of time and repay what they have borrowed. Lakeland Bank offers eight tips to help get you on the road to an excellent personal credit score on the Lakeland Bank Blog.