If you are looking to get a loan for your business, you might think to yourself, “well, self, I have a great credit score. I can get this loan, no problem!” While you might be riding high with a credit score over 740, that doesn’t mean your business credit score falls into the excellent category. In fact, your business might not even have an established credit score at all. Let’s take a look at which credit score your bank will use when applying for a loan.
You Have More Than One Credit Score
Many small business owners don’t realize it, but you likely have more than one credit score. First, the one most people know about, is your personal credit score. The most popular method to measure a personal credit score is the FICO score, or another similar scoring model. The range of FICO scores falls between 300 and 850.
Next are your business credit scores. While your personal credit score is calculated based on your personal history with credit cards, student loans, mortgages, personal loans, and other debt, your business credit score is only focused on your business credit accounts. For example, a personal credit card does not impact your credit score, but a card opened under your business name, with your business EIN, can contribute to your business credit score. (You can check your full business credit profile — personal and business credit scores — for free on Nav.)
Nav accounts share three of your credit scores. A free account includes your Experian and Dun & Bradstreet business credit scores, which are reported in your Nav account on an A to F scale, like your grades in high school. The FICO SBSS is a small business credit score which is only available with a Business Loan Builder. The FICO SBSS score is particularly important if you are looking for an SBA loan.
Dun & Bradstreet’s Paydex Score is one of the most widely used business credit scores. (The A-F score in your Nav account corresponds to a Paydex score on a 1 to 100 scale.)
Each reporting bureau may have slightly different data, but they should be fairly similar. The major bureaus for personal credit scores are Experian, Equifax and TransUnion. For business scores, Nav uses your data from Experian, Dun & Bradstreet and FICO.
Who Is Applying for the Loan?
The first step in determining which of these scores your bank will use is to look at the details of your intended loan. If you are looking to make some upgrades to a home office, it may be best to keep the loan personal. But if you are looking to borrow to fund your growing business, you are best off applying for the loan under the name of your business.
When applying for a personal loan, like a mortgage for your family’s home, the bank only cares about your personal credit scores, as you are personally liable for the loan. They don’t care about your business credit score per say, the lender cares more about your total personal income and ability to pay back the loan.
When applying as a business, your business credit score comes into play. This does not mean the lender will not look at your personal credit score too. Don’t be fooled into thinking an excellent business credit score will do enough to offset a bad personal credit score. If you are a small business, your personal credit score still matters. And if you are a sole proprietor, your personal credit score is effectively your business credit score, so that personal score matters even more!
For very large and established businesses, an underwriter may be happy to process a loan application with only a business credit score. However, in most cases, they want a glimpse into your personal credit as well. Your personal credit history and how you handle your personal borrowing is a good indicator of how you will treat your business loans, which is why your personal credit score still carries a lot of weight.
During his presidential campaign, former Massachusetts Gov. Mitt Romney famously said, “corporations are people, my friend.” In the eyes of your bank, that is the case to some extent. If the business is applying for the loan, the business credit score is the primary concern. However, the bank also cares about the person, or people, behind the business.
Know Where Your Credit Scores Stand
Running a business is stressful enough without worrying about loans and borrowing. When you throw that into the mix, it is important to work hard and maintain strong personal and business credit scores.
The fundamentals of building a strong personal credit score also apply to your business. Always make 100% on-time payments. Never miss a payment or pay late, that is a fast track to a lower score. Keep your revolving balances, that’s bank jargon for credit cards and lines of credit, as low as possible.
For your business score specifically, there is a lot you can do to improve your score before applying for a loan. Ensure vendors and suppliers are reporting and pay invoices 30 days early or more to have the best effect on your score.
If you go into the borrowing process informed and prepared, getting a business loan doesn’t have to be difficult or stressful. Whether you are looking for a line of credit to help with inventory, an installment loan for new equipment, or a mortgage for a new building, you and your business can find a way to get it done. If you follow smart business practices and stay on top of your credit, you won’t have any problems getting a loan with your personal or business credit score.
This article was originally written on June 15, 2017 and updated on October 20, 2020.