“SMBs need to take care of personal and business credit scores.”
[Editor’s note: This podcast originally aired on Lendio.com as part of their Business Fuel Podcast series.]
In this interview, Nav’s Founder, Levi King, discusses:
- The difference between personal and business credit
- Why small business owners should pay attention to both
- How to make your business attractive to any lender
From the transcript:
Patrick Wiscombe: Well let’s bring in Levi King. He’s the founder and owner of Nav. He is the former President of Lendio. When did you leave Lendio and why did you start Nav?
Levi King: I left about two years ago. When I helped found Lendio, I thought there were a couple of big problems that needed solving. First is something that Lendio does very well, that being helping companies find the best financing they are qualified for. It sounds easy, but it’s not. The other problem is, what about those business owners that don’t qualify for anything or don’t like what they qualify for? So that’s the problem Nav seeks to solve.
Patrick: What drew you to this business in the first place?
Levi: The first four business I started, that were all successful in their own right, were all main street businesses. The first business I started was a custom sign and awning business. I was in my early 20’s and was naive enough to think I could do it. From there I did financial services for Hispanics. Pay day loans, car loans, tax prep, lots of services for Spanish speakers. Then I was a franchisee in the restaurant business in Colorado. I even owned a hotel at one point. All main street businesses and I dealt with personal and business credit all the time. It was always misery to try and understand what third parties looked at. So I have deep customer empathy. That is one of our competitive advantages. We are the customers advocate.
Patrick: What is your favorite thing about being an entrepreneur?
Levi: It’s hard to say because I’ve only ever been an entrepreneur. I like being able to do things fast, to respond to things as they come. In every business I’ve had, I’ve failed multiple times. But those failures tell you where you need to go. People in large corporations are shackled by policy and people. I love being able to be nimble and respond to business demands.
Ty Kiisel: We have talked in the past about how the FICO score is flawed. I think you would agree with that. But we’re kind of stuck with the system we have. That’s why it’s exciting to talk to you because you can discuss some of the things a small business owner need to do to be better prepared. I’d like to start off with personal and business credit. I would imagine there are a lot of business owners out there that don’t realize they have two credit scores and they need to take care of both. Why don’t you give us a little color on that.
Levi: Personal credit reports and scores will always matter to the business until they get big enough to stand on their financials; their tax returns and books. So there’s a lot of questions around how do I address my consumer credit as a business owner? In addition to all that, there’s the business credit. How do you digest those data sets and improve them? In the consumer space, if you’re watching one credit bureau, you’re probably going to have about 97% consistency with the other two bureaus. So you’re probably going to be ok if you’re using a service like Credit Karma. As a small business owner, there isn’t that consistency across bureaus. It’s a lot more fragmented. You’ve got to stay on top of it and make sure the data set is clean.
Ty: There’s no FCRA rights for small businesses. Maybe we should explain what the Fair Credit Reporting Act is and why it doesn’t apply to small businesses and what that means.
Levi: The Fair Credit Reporting Act is a piece of Federal legislation that governs the credit bureaus and credit space in general. It gives consumers rights. So if there’s an error on your credit report, there’s a venue for you to fix that error. There’s a process you can go through. 25% of all consumer reports have an error big enough to experience adverse results if they were to try and seek some type of financing. That’s a big deal. In the commercial space, the problem is even worse. There is no FCRA equivalent. There’s no defined process and you don’t have rights. You have to work at it a little bit more to make sure your ducks are in a row. We see it all the time. Our first customer was Wells Trucking in Arkansas. There is also Wells Trucking and Excavation. Almost the same name. As we look into it, he sees that Experian has him with a bankruptcy, tax lien and a couple of judgements. He has a terrible business score. But big news, it wasn’t him. He knew it was the other business because he had actually been served by the Sheriff one time. We see stuff like that all the time. In the franchisee space, many business can share a zip code. There are enough data points that things can get crossed. They start showing up on each other’s credit reports. It’s like the wild west. You have to deal with it through some hard work and bloody knuckles.
Ty: So what can you do since there’s no FCRA to help?
Levi: The good news is the credit bureaus want good data. They don’t want to have errors on the reports. They do provide a dispute process where those things can get taken care of. This happened to me a long time ago. I learned by beating my head against the wall. I got my Experian credit report and found some of my brother-in-law’s business debt was reporting on my business. I have no idea how they crossed. It might be because we had previously been business partners. I was able to submit documentation, but it took a few months. In the consumer space, the bureau has 30 days to fix the problem. There’s just not the rush on the business side because they won’t get in trouble if it takes them 3 months instead of 30 days.
Ty: Are there things you can do as you’re starting your business to make sure you’re building good business credit?
Levi: Absolutely. One of the biggest mistakes that new businesses make is they lack money, so they start using personal credit cards. If you have a personal score of 800 and you max out all your cards, your score will drop below 700. It’s that severe. The very first thing you should do is open some business credit cards. Those won’t report to your personal credit. So if you start to max out some credit cards, no big deal because it’s not your personal credit. It will also start to establish your business credit. That leads to the question of how do the bureaus know when you start a business and when do they start a record of your business? It happens immediately when you file a public record. If you file a sole proprietorship, LLC, corporation, or any time of public entity, that creates a public record with the Secretary of State. So you’re on record and you have some credit cards. The very next thing you do is get
some vendor accounts. Depending on what type of industry you’re in, you can open accounts with Home Depot, Office Depot, UPS, FedEx. The accounts will start out small, but they will get bigger over time.
Ty: If you start doing this right out of the gate, how long would it take lenders to stop asking for a personal guarantee? How long does it take before your business is able to stand on it’s own credit wise?
Levi: That’s a great question. And there’s a lot of misinformation as to what the answer to that question is. As it relates to a traditional loan, you will never get away from having your personal credit in the mix. However, you won’t report to your personal credit. They’ll check your personal credit and you’ll likely always have to personally guarantee it, but it doesn’t report to your personal credit. There’s a lot of companies out there that preach if you have good enough business credit, you can get an SBA loan without using your personal credit. It’s not true. But then there’s this whole other world of financing which is vendor financing. For example, if you’re a contractor and you get all your supplies at Home Depot, you can get a line of credit through them. They will only look at your business credit. We are big proponents of that.
Ty: It sounds like the need to protect and make sure your personal credit is good never goes away. What are some of the common errors you might see on your personal credit report and what do you do to fix them?
Levi: Usually when you think of errors it’s the erroneously late payment or an erroneous public record. Those things happen. But just as common are errors such as revolving amounts on your personal credit card and duplicate accounts on revolving accounts. So what does a duplicate mean? It means a creditor is reporting a credit card to the bureau and for some reason, the bureau is double counting that. It happens all the time. But you can dispute that. The bureaus want clean data and that’s what a lot of people don’t understand. Another one that’s even more common is erroneous revolving amounts on the credit. Many businesses use credit cards and pay off the balance every month. They use electronic bill pay and pay on the day it is due. Why pay it in advance? The problem is a lot of credit card companies close out their data. So the payment might not be reflected. That can artificially deflate a score by 100 points. You can fix that by scheduling your payment 3 to 5 days before the due date so the payment actually clears before the creditor clears out the data and reports to the bureau. These are all things we have built into our product. Our product is dynamic. That’s an example you don’t read about on a blog.
Ty: If someone comes to me and asks what’s the first step to monitoring my personal credit, I would say go to Equifax or TransUnion. Make sure you know what your credit is to start with. I would assume you do the same with business credit. What kind of advice, in that regard, are you giving your customers?
Levi: We recommend they keep an eye on it year round, in real time. A business owner will use their credit 10x the rate of a consumer. The stakes are higher and their livelihood depends on it.
Ty: It’s pretty easy. I have an Equifax account. Every month I get a report in my email. I would imagine a lot of this is included in the services you provide?
Levi: Yes. Our product is exclusively for small business owners. It covers personal credit and business credit. We don’t talk to them about consumer credit, only as it relates to the business. When they sign up for Nav, they get TransUnion data. But we’re talking to them as a small business as it relates to TransUnion. We give them access to Experian consumer data, TransUnion consumer data, Experian commercial data, Dunn and Bradstreet commercial data, and coming soon, the FICO business score. We believe the world is changing. It will take a long time to change, but there are some other data sets that are emerging that we think will be just as important in the future.
Ty: What are some of those things?
Levi: First is depository data. That is the primary underwriting data. It is still supplemented by personal credit and business credit, but the alternative lender as reversed that. The qualifier is the data that banks don’t look at until the end. When a merchant cash and capital is pulling business credit, they don’t usually care what the score is. They’re looking more for the negative data, the actual content of the report. Let’s say you have perfect business credit and a bank is underwriting you and they’re looking at cash returns that are now 15 months old. And they’re looking at QuickBooks data that you might have cooked the books on. Versus OnDeck that’s looking at your checking account data from the last year. They can discern if you have more customers or less. Are you going up or down? Are customers spending more money with you or less? So you can look at all this trending data. The challenge will be how can you access that data quickly and accurately? We feel that will change the whole business landscape. So that’s actually the first score we’re building. We will pull all the raw transactional data from the past year and build the score factors just like a credit report. We’ll do the same with QuickBooks data. It becomes really powerful. We’re actually filing some patent applications on this. We’re on the cutting edge of this. We’re educating business owners that their checking account data really does matter.
Ty: The thing I like about this is you’re actually doing something to make borrowers a better borrower. You’re educating them on what to do to build a better credit score, right?
Levi: That’s right. And not through quick fixes like credit repair. It’s actually about making correct decisions and behaving the right way. If you go through credit repair and you never learned to make your payments on time, you’re going to go right back to that behavior. We encourage people to do it the right way through our product.
Ty: How soon in your business lifecycle should you start working with someone like Nav?
Levi: Disclaimer is that I’m heavily biased. But I’m biased by seeing thousands of bad experiences business owners have had by not getting started earlier. In our opinion, you start the day you start your business. Make sure your business credit profiles are set up properly. It’s a lot easier to get is set up right from the beginning, then to go back and fix it later.
Ty: How do people contact you if they want to engage Nav to help them through this process?
Levi: Go to our website and sign up online. If they’re a new business and there’s no record at the business credit bureau, they can register right there through our site. We’ll set up their DUNS number and their EIN number. If they are on record, they can see those reports. We report as a creditor, so we’ll show up as one of those trying to help them establish credit. We also have member services that can supplement what they can do online. They’re welcome to call at any time and talk to us as well.
Have at it! We'd love to hear from you and encourage a lively discussion among our users. Please help us keep our site clean and protect yourself. Refrain from posting overtly promotional content, and avoid disclosing personal information such as bank account or phone numbers.
Reviews Disclosure: The responses below are not provided or commissioned by the credit card, financing and service companies that appear on this site. Responses have not been reviewed, approved or otherwise endorsed by the credit card, financing and service companies and it is not their responsibility to ensure all posts and/or questions are answered.
4 responses to “Podcast: Personal VS. Business Credit Scores”
Thanks, Caton for your comment. Business Credit Reporting appears to be on the fringe of some sort of criminal activity. I’m convinced the more you pay in fees and credit monitoring services to D&B the better your credit picture looks appears to others. More information regarding these practices need to be exposed and investigated until some fair practices are establishe.
Ray, the real issue is the lack of regulation around business credit. Personal credit is highly regulated and one of the main laws is the Fair Credit Reporting Act (FCRA). The FCRA dictates what information is reported on personal credit and how it is reported. Unfortunately, there is no FCRA for business credit. As you state, because the actual creditor/vendor name isn’t reported, it is hard to determine who is reporting the late payments. If you knew who it was, you could go after the creditor. Also, with so many payment terms used, reporting to the bureaus is difficult. I’ve gone through the process of getting set up to report information to D&B, and it is super confusing. I believe that most companies reporting to D&B or other business bureaus aren’t sure what they are doing. Remember, it isn’t regulated and hasn’t become standardized like the personal side has. Each bureaus has their own reporting system. At Creditera, we are trying to solve this problem and provide more information to small business owners like yourself. In our minds, it is one of the biggest issues business owners face related to credit.
Good question, David. It can be confusing. Business credit scores work differently than personal credit. When you establish trade credit with vendors or suppliers, they’ll typically grant Net-30 or Net-60 day terms. In order to get a perfect “100” PAYDEX business credit score, you have to pay 30 days before payment is due. Paying on time will only give you a score of “80”–still a good score–but not the best. So, technically, you could pay bills on time and still see your business credit scores drop. Don’t stress about getting a perfect score though–as long as you pay on-time or early, you’ll be fine.
So let me get this straight, if I pay my bills on-time then my credit score will go down? How does that make any sense?