Not too long ago we talked about the Five ‘C’s of small business lending. Among the other four important ‘C’s, we identified Credit Score as one you can’t afford to ignore. Although there are other contributing factors most lenders look at to determine your creditworthiness, because every lender wants to know your credit score, it’s at the top of my list.
In addition to your personal credit score, did you know you also have a business credit score?
Although we’re talking about business credit scores, if you’re a small business owner, you should know your personal credit score is every bit as important as your business credit score—particularly when we’re talking about early-stage small businesses. In fact, most lenders will require a personal guarantee on any small business loan they offer an early-stage small business owner on any business loan.
It’s important to monitor your personal credit score, and you can do that with any one of the three major credit bureaus: Experian, Transunion, and Equifax. For a very nominal fee, you can access the same information every creditor uses to evaluate your credit. You’ll also see any information that negatively reflects on your credit score. Unless there are errors on your report, it will be time that heals all wounds. If someone claims to have a magic wand and suggests they can magically repair your credit score, be skeptical. Nevertheless, anyone diligent in efforts at improving their personal credit score can see it improve 100 or so points in as little as six months.
What might be confusing to many small business owners are the reporting bureaus for your business credit. With the exception of Dunn & Bradstreet, there are some familiar faces on the list—Experian and Equifax. In other words, as a small business owner it’s likely that you’ll have two
A friend of mine, Levi King who is a Lendio founder and currently CEO of Crediterra, experienced this first hand a few years ago.
“Mid 2005 I got a generic form letter in the mail that said my application for financing was rejected due to information found on my Equifax credit report,” he said. “I knew my personal credit was spotless and I got real mad, being sick and tired of all the bull I had been fed over the years by banks about commercial financing requirements.”
After several heated phone calls “…an underwriter clarified that it was my business credit report with Equifax that was a problem, not my consumer credit report with Equifax (the form letter I received did NOT specify).”
Although he was aware that Dunn & Bradstreet reported on business credit, he wasn’t aware that both Equifax and Experian also produced a business credit report. At the time, they could only mail him a copy of his report, which he received three weeks later.
“Once it was finally in my hands, among other egregious errors, the credit report listed my brother-in-law as a partner in my business (he wasn’t), and contained numerous commercial loan accounts that weren’t mine, totaling about $750k in erroneous outstanding debt,” he said.
The lender turned down his loan application because he thought my friend was hiding a business partner (a common tactic when one business partner has poor personal credit), and thought they were hiding debt by not including it in the financials. Any one of these things would throw up red flags and make it tough to get a small business loan.
“It took a little while to sort it out with Equifax and the lender, and it was a pain along the way, but I ended up getting approved for the loan once my business credit was ironed out (i.e. corrected),” he said.
If you were previously unaware that both a business and personal credit report existed, you now know you need to monitor both. My friend’s advice on the subject is pretty straightforward, “In addition to D&B and Equifax, make sure to check your Experian business credit report. Make sure every detail is correct, including seemingly random things like your industry and revenues. Any single error can derail your attempt to secure financing for your business.”
