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Small Business Financial Article

Small Business Financial Article
Rich Best has spent 28 years in the financial services industry, as an advisor, a managing partner, directors of training and marketing, and now as a consultant to the industry. Rich has written extensively on a broad range of personal finance topics and is published on several top financial sites. Recent books include The American Family Survival Bible and Annuity Facts Revealed: What You MUST Know Before You Invest.

Business vs. Personal Credit Report – What’s the Difference?

Business vs. Personal Credit Report – What’s the Difference?

Business and consumer credit reports are similar in their purpose, which is to provide prospective lenders with a credit profile for determining credit risk. For business owners using both personal and business credit, it’s important to understand the difference and how they’re used.

Approved, Finance, Business, Loan, Banking, Credit

Personal Credit Report

When you open your first credit account, the credit reporting agencies – Equifax, TransUnion, and Experian – begin compiling a report of your credit activities. Anyone with a “permissible purpose” may request your credit report that includes the following:

  • A running history of all your credit accounts, including credit cards, mortgages, installment loans, auto loans.
  • The current balance owed for each account
  • The current monthly payment for each account
  • A notation of each account’s status – current or delinquent
  • Closed accounts and the reason closed
  • Public records including judgments, liens, and bankruptcies
  • Employment history
  • List of current and former residences

Using their own proprietary formulas, the three credit bureaus analyze the information in your credit report to generate a credit score as a measure of your credit risk to lenders. The credit scores from the three credit bureaus may differ slightly, but they are based on the methods and formulas used by Fair Issac Corporation, which produces your FICO score – the most common score utilized by lenders.

You are entitled by law to receive one free credit report from each of the credit bureaus annually. Typically, your credit report does not include a credit score, which may have to be purchased separately. Many banks and credit card companies now offer free access to your credit report and credit score.

Business Credit Report

Business owners who want to obtain credit for their businesses must establish a separate credit history for their businesses. The first step is to obtain a federal identification number (FIN) – a business’s version of a Social Security number. Transactions made under a business’s FIN are tracked by the business credit unions, which include, Dunn & Bradstreet, Experian, and Equifax. Specifically, they begin tracking certain trade credit (vendor buy now, pay later arrangements) and other credit activities.

Your business credit report includes the following:

  • Background information on the business including ownership and subsidiaries
  • Financial information
  • History of banking, trade credit transactions and collections
  • Public records including judgments, liens, and bankruptcies
  • Risk score

Your business’s risk score is similar to an individual’s credit score in determining creditworthiness. However, unlike a credit score, which is generated from three different credit scores using similar methods, a risk score is generated from three different credit scores using completely different criteria for scoring creditworthiness. Anyone can purchase your business credit report from the credit bureaus.

Mixing Personal and Business Credit

Once a business owner establishes a separate business credit profile lenders will accept an application for business credit. But, it doesn’t necessarily mean they will approve it. Until a business firmly establishes a credit history or, until the business has a well-established operating history (at least five years), lenders will likely rely heavily on the business owner’s personal credit profile for determining credit risk. In many cases, they will require a signed personal guarantee from the business owner.

There’s no reason to wait to start establishing your business credit. It’s a process that could take several years. But, you can jump start it with the following steps:

  • Create a business identity by obtaining a federal identification number (FIN).
  • Request a DUNS number from Dunn & Bradstreet
  • Separate your business and personal bank accounts and record keeping.
  • Begin working with vendors ASAP to establish trade accounts.
  • Get a business credit card using your FIN.
  • Make on-time payments.
  • Review your business credit reports from the three reporting agencies regularly to ensure they are being updated.

You will find that business credit reports can be very useful tools for managing your business finances. For a fee, the three credit bureaus provide detailed analysis that can be used for business forecasting and managing your business credit risk. Maintaining a good risk score can translate to more access to financing on favorable terms and lower premium costs on commercial insurance.

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