Every employee these days knows that, when being offered a job, it's common to have your prospective employer run a background and credit check. Even if the employee isn't in the cash room counting the day's take, negative items on a credit report can raise a red flag about the employee's decision-making skills and degree of responsibility.
But, if you own the business, your credit is a nonissue, right? That's a common misconception among many new entrepreneurs. Here are some of the ways your credit score, and that of your business (wait, my business has a credit score?) can impact your operations and bottom line, from the credit experts at VantageScore.
How personal credit scores are different than business credit scores
The two scores are not measuring the same thing. Personal credit scores, like VantageScore 4.0, measure the likelihood you'll fall behind on your bills or have some other negative financial behaviors over a time horizon. Business scoring models are often different and are trying to predict different behaviors. For example, business credit scores commonly predict how many days the business will take to pay. Businesses are also scored using a different scale. Personal scores typically run on a scale from 300 to 850. Generally, if you're 650 or above, you're OK. Anything below, and you've got work to do. Business scores often don't have the same scale. They range from zero to 100 in some reporting agencies and from zero to 300 in others.
Why personal credit scores are important to starting up a business
For a new entrepreneur, especially if you're a sole proprietor, having a strong personal credit score could mean the difference between receiving optimal financing for the business and not getting the best rates. If you get a business loan, your personal score will really be important. It can also help in smaller ways, like getting a cell phone plan for the business without a hefty deposit. Even if you're a more established business owner, maintaining strong personal credit, along with strong business credit, is important as well. You may need additional funding down the line, or want to buy your own storefront. Strong credit makes the world go round.
Scores like VantageScore 4.0 also use trended credit data, which can indirectly help your business. For example, if you charge significant amounts on your personal credit card for business expenses, but do not pay off those charges in full, you aren't penalized the same way as with more conventional models.
How to get a business credit score
It doesn't just happen. You must incorporate, get an Employer Identification Number, and obtain a DUNS number from Dun & Bradstreet. Your Employer Identification Number is one of the keys to business credit and is your credit profile number. You'll have to begin to have financial, vendor or trade accounts that are reported to one of the many commercial credit reporting agencies.
How to build a strong business credit score
Pay your bills on time, establish vendor credit, keep your debt at a workable level, and have good cash flow and reserves. The longevity of your business also comes into play when calculating its score. For new businesses, the lack of longevity can bedevil their scores, but keep at it. The longer you're in the black, the better your score will be.
How to monitor it and why it matters
As an individual, you're allowed one free credit report from the three national credit reporting agencies every 12 months. With business, it's different. Business owners can monitor their scores by contacting commercial credit reporting agencies and often pay a fee to get their full reports. Do this regularly and look for errors in your business credit reports that could impact business scores.
Hiring employees and credit
When hiring employees, it's common to do a background and, in some cases, credit check. It's especially important if the employee will be handling money, because impropriety in your cash room or in the till can affect your business adversely, wreak havoc with your bottom line and ultimately affect your business credit score if the theft is so bad it impacts your cash flow or your ability to pay vendors. Credit scores are not included in the employer-requested credit report (and the credit reports can only be obtained with permission from the employee or prospective employee).
Company credit cards
Using a company credit card is a great way to build positive credit for your business. Using your business card for business is a win-win for you because you protect your personal credit and grow your business credit at the same time. But as with personal credit cards, keep your business card's utilization low.
For additional reading about business credit, here are some resources from the pros at VantageScore.