Comparing Business Credit vs. Personal Credit

During the Merchant Application process, you may have been asked to provide your personal Social Security number even though you were applying for a business Merchant Account. Providing this information to us makes some people feel uncomfortable because they want to keep their business credit and personal credit separate. Today, we will share some of the reasons why we ask for your Social Security number and the differences between personal and business credit.

Why We Ask

The first reason is for identification purposes. We need you to verify who you are when you call in for support. We may use this data or your date of birth to verify who you are. As a banking entity, we legally must verify who you are. Depending upon the legal structure of your business and how long your business has been operating, we may need to rely on personal credit to approve your Merchant Application. This is especially true of Sole Proprietor business models.

Credit Scores

You likely know what your personal credit score is and understand the importance of maintaining a high score. Businesses have credit scores just like individuals and just like your personal credit score, a business credit score is a measure of how trustworthy your company might be for extending credit. While business credit and personal credit scores may represent similar goals to lenders, they also have several differences. 

Business Credit vs. Personal Credit?

The main differences between business credit vs. personal credit are:

  • Calculation Standardization: Generally, individuals only have one credit score. Businesses, however, can have several different scores calculated by different factors. Those factors are based on your net worth and your repayment risk. Various other factors can influence these different scores.
  • Score Ranges: While personal credit scores usually rank between 300 and 850 on the FICO scale, business credit scores can be ranked on several different numerical scales, depending on the score type.

An Unexpected Bonus 

Businesses with great credit scores have lower insurance rates. This can make a huge difference as you grow your business. Insurance companies review your credit scores as part of their underwriting process. With healthy business credit scores, you can keep your insurance rates down. 

Privacy Rights 

Unlike your personal credit, business credit scores are considered public record. You or anyone else can access and audit your business credit. Personal credit information is limited to you, the company maintaining your file, such as Equifax and authorized creditors that you give permission to do so through an application process. The right to privacy is completely different when it comes to your personal credit vs. your business credit.

Why You Need Business Credit 

While you may have financed business loans based on your personal credit, this isn’t the best move for your overall financial health. You could also miss out on some worthwhile benefits that business credit provides.

Better Loan Terms: Because business loans are generally used to finance large purchases like equipment, building expansions, inventory and other operating expenses, good business credit can provide longer-term repayment schedules that can lower your monthly payments. Those types of business loans are generally not available based solely on personal credit.

Protecting Personal Assets: Large loans may require collateral for financing. When applying for a large business loan with personal credit, your personal assets such as your home or vehicle can become encumbered and subject to seizure if the business can’t make the payments for any reason. By using business credit, you can put up collateral the business owns like machinery, equipment, or business real estate while protecting your personal assets.

Protecting Personal Credit: By using your business accounts rather than your personal accounts you will not only safeguard your personal assets, but your personal credit score as well. If the business doesn’t succeed, your personal credit could be ruined if you mix the two. Maintaining a separation of business and personal credit is crucial to your overall financial health. 

Business Credit Scores Calculated

There are three main credit bureaus that calculate business credit scores. They are:  Equifax, Experian, and Dun & Bradstreet. However, each bureau scores differently while using three key pieces of data to calculate your business credit score. We will breakdown what you need to know about each of the three bureaus. The core data analyzed includes:

  • Your business’s payment history
  • How much of your credit you use
  • Your personal net worth

Dun & Bradstreet

Dun & Bradstreet focuses on two main scores: Your “Failure Score” and your “Paydex Score”. The Paydex score is zero to 100 and is based upon your business payment history to creditors. To have a Paydex Score with D&B, you’ll have to request a D-U-N-S number from Dun & Bradstreet through their website and have at least four creditors of record. The Failure Score is usually a one-to-five “class ranking”, based on your business’s likelihood of financial distress in the future. The age of your business, your history of financial lawsuits, your net worth, and other similar factors influence this score.

Equifax

Equifax uses three scores: The Payment Index, The Credit Risk Score, and the Business Failure Score. All three are used to evaluate your business credit. The Payment Index ranges one to 100 and reflects your percentage of timely payments. It’s important to note that this score is not used to predict future payment history. The Credit Risk Score predicts how likely your outstanding debts are to become delinquent. It scores from 101 to 992 based on business size, oldest financial account, credit limits, and missed payment frequency. Finally, the Business Failure Score measures the likelihood of your business closing within the next 12 months. This score ranges from 1,000 to 1,610 and is calculated by using your history of maximized credit, late payments, and your oldest financial account.

Experian

Experian focuses on one single score: The CreditScore report compiles your payment trends, account history, and public records into one single number between zero and 100. By comparison, this score covers the widest range of factors of all three bureaus. For this reason, this bureau is likely the best one to pull from.

Check Your Scores

We recommend that you check your scores from all three credit bureaus on an annual basis to check for irregular issues or fluctuations in your score. Be sure to address any irregularities promptly. Knowing what your scores are and what they mean to your business is an important part of managing the financial health of your business.

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