Too often we see business owners applying to get financing where the terms and rates offered by the lenders do not totally match their expectations. This mismatch can be the result of the age or type of equipment however more commonly the results are due to credit related issues such as a poor credit score, collection items or even a lack of credit history. Whether or not you are applying for financing, a good credit score is necessary for the long-term financial health of your business. Credit is not the only consideration lenders use when considering lending, but scores weigh heavily into the decision regarding rates and terms. Below we will make an attempt to explain what the scores are, why you want a good score, and easy strategies to improve your personal and business credit scores.
Why you want a good score.
Many lenders still feel our credit score represents our financial character – when it comes to credit, how we use, borrow, and repay credit in our personal or business accounts. Lenders, and other businesses, are looking at that score, making that character determination and assigning a risk profile to working with you.
A personal credit score is between 300 and 900; see what a good score is for Equifax and Transunion by clicking on the hyperlinks. Your business score is typically between 0 and 100 and can vary between providers, but in general a business will have a better score the more they pay invoices on time, stay out of legal trouble and do not incur too much debt – see a sample Equifax report here.
The biggest benefits to having good personal and business scores:
- Potential for significantly lower interest rates when borrowing
- Better terms and options including premium products and programs
- Better insurance rates
- Better work and vendors – other businesses might be looking at them before they work with you
- Fewer Personal guarantees – a good commercial credit score means a business can stand on its own when borrowing without the owners having to have provide personal guarantees
Your Personal Score
In Canada our personal credit scores are accessed mostly through credit reporting agencies such as Equifax or TransUnion. Equifax and TransUnion are companies allowed to collect information about your financial “experiences” such as debts, balances, types of accounts, how long you have had accounts, applications, transactions and even legal items and collections. You can see your score through free apps, most credit cards and bank account logins, but these are not your FICO score, so soft credit scores vary wildly between providers and only occasionally match your actual score. See strategies for a good personal score – blog.
Your Business Scores
As a business there is a separate score that has the same function as a personal score but with a few differences; like personal scores, business scores can also be obtained through Equifax and TransUnion however there are a few other’s lenders can access as well such as Dun & Bradstreet and PayNet. Unlike personal credit reports, commercial credit reports are public information and nearly anyone can pay to get one to see on a target company. Commercial scores are much more difficult to build as many lenders and trades do not report to the credit agencies. For this reason, a business will often need to provide financial statements and/or guarantees of the owners. The score is based on your company name and address and phone number, so it is important to always use your full company name on contracts, invoices, and documents.
There are no short cuts to getting a good personal or business score, however there are a few practical strategies we can use in the short term:
1. Be aware of your credit history
2. Look for any errors and report them
3. Follow the SEVEN TIPS TO IMPROVE YOUR CREDIT SCORE.
Finally, the most important factor is to do your best and do not give up on having a great credit score.
Below are a few resources you can go to for further information.