We know we have a personal credit score and what it says about our personal credit history to be fair. However, many business owners understand that their personal credit will likely be part of any business creditworthiness decisions. This can make understanding the difference between personal credit and business credit a bit confusing.
Making Business Credit Decisions Isn’t Easy For Lenders
It’s not hard to understand that a small business owner looking for a loan or line of credit may not be too concerned about the ease or difficulty facing lenders as they make creditworthiness decisions — but they should. As a business owner, if you understand what lenders are looking for, it will help you prepare. Also, it should improve the odds of finding the financing you need.
The many businesses don’t are illustrated by a report published every year by the Federal Reserve. The Fed’s Small Business Credit Survey dives into the landscape of small business lending, the availability of funds, and some of the challenges faced by small businesses seeking borrowed capital. Their 2019 report, reflecting 2018 data (the most recent), reports that less than half (47%) of the businesses that applied for financing receive the money they were looking for. In other words, the odds of success with a lender is less than winning the flip of a coin.
Not very good odds.
Why Aren’t Businesses Successful When They Apply For Credit?
The Fed reports several reasons loan applications were denied. Some include a low credit score (36%), too much current debt (35%), insufficient collateral (35%), insufficient credit history (33%), weak business performance (23%), and other issues (5%).
Understanding the FICO SBSS Score will give you an “inside baseball” look into what lenders are looking for. It will tell you how they are making credit decisions about your business. It will also tell you what you can do to improve the odds of a successful credit application.
Although the credit requirements for a line of credit, a business loan, or even a business credit card may vary, managing both your personal credit score and business credit profile to improve the odds of a successful credit application will make a difference. It’s also important to know which credit bureau the creditor reports to because they don’t always report to the same places. This can be particularly true for credit cards. Primarily because some “business credit cards” don’t report to the business bureaus, so you can’t simply assume that they do.
What Is The FICO SBSS Score And How Is It Calculated?
In a nutshell, the SBSS score reflects your personal and business credit history and some other general financial information about your business. It considers how long you’ve been in business, your annual revenues, how many employees you have, and any tangible assets your business may own. Although the lender might not express it this way, most lenders have three questions they are trying to answer with all this data:
1. Can your business repay a loan?
Does your business have the financial ability to make periodic payments? This will be reflected in your annual revenues and cash flow. You should expect most lenders to ask for at least three months of your business bank account records to confirm that you have a consistent cash flow.
2. Will your business repay a loan?
Does the business, and the business owner, have a good track record of servicing debt and otherwise meeting its financial obligations? Lenders look at your credit profile for this. How long have you been in business, and what does your credit history look like? The FICO SBSS score takes into account your personal history. It also considers your business history and sheds light on how you’ve serviced debt in the past. They use this information to determine what you’ll likely do in the future based upon what you’ve done in the past.
- Will you have the means to continue making loan payments if something unexpected happens? Many traditional lenders (including the SBA) will require a business case, the resumes of the company principles (if there’s more than one of you), and take your business’ general financial health into account. It’s also why lenders require either collateral, a business lien, a personal guarantee, or some combination of all three to secure a business loan.
The SBSS score allows a lender to take a more holistic approach to evaluate your business’ creditworthiness. It does this by looking at a broader view of your personal and business’ financial health. This is a good thing for many owners with healthy businesses that might not have a lot of collateral or would have their application rejected for some other reason.
I agree; your personal credit might not say anything about how your business will meet its loan obligations. However, it does say something about you. If you have a strong personal credit history, it will benefit your business if your lender uses the FICO SBSS score to evaluate your business credit application.
How Does The SBSS Score Work?
A lot of data is aggregated to inform the score.
- The score is used to decide business term loans and credit lines up to $1 million.
- The score is expressed in a value of 0-300, and lenders use the score to pre-rank an applicant and determine the likelihood of a business making timely periodic payments (the higher the score, the better). You can think of it as a go-no-go metric before a borrower is considered further in the underwriting process.
- Most traditional lenders set their minimum acceptable score for a small business loan at 160, but the SBA will sometimes go lower (140). The SBA’s mandate is to help small businesses with financing that might not qualify for a more traditional loan, which is why their minimum acceptable FICO SBSS score is a little lower.
- The score considers personal and business credit history and other business financial information, making it incredibly important for small business owners to monitor and maintain a good personal credit score and a strong business credit profile.
- It’s critical to start building strong business credit early because the Fair Credit Reporting Act does not cover businesses, and your business can be denied financing due to your SBSS score. What’s more, lenders aren’t required to notify you of the reason why your application was rejected, so you may be left in the dark.
FICO SBSS Scores Offer Lenders Flexibility
The FICO SBSS score is also flexible to give lenders some choice in how they use the score. Lenders create credit models that reflect the information and credit criteria they value the most. So the score is not universal. In other words, it’s a reflection of the individual lender’s preferences.
The score takes into account what’s reported by the business credit bureaus. It also weights how they individually report on your business credit. For example, one lender might consider the value of Experian’s Intelliscore higher than D&B’s Paydex score, or the other way around. Yet, if there’s not enough business credit data available, it will use a business owner’s personal credit data to fill in the blanks and calculate the score along with your business’s financial information.
For example, early-stage businesses with a weak business credit profile could get an SBSS score of 140. This is the minimum score to pass the SBA’s pre-screen process, but it would require a nearly-perfect personal credit score.
How To Improve Your FICO SBSS Score:
Fueling growth and funding many other business initiatives often requires borrowed capital for many small businesses. I’m convinced there are more options available today than ever before for businesses to access capital. However, they aren’t all created equal. The companies that proactively approach their credit profile to make it as strong as possible have more options. Those options may include better interest rates and more favorable terms.
Improving your score isn’t rocket science, but it does require effort. Here are four things you can start doing right now that will improve your FICO SBSS score.
1. Get familiar with your credit profile
That includes both your personal and business credit profile. It’s human nature to impact the things we pay the most attention to positively. All the major credit bureaus offer individuals the ability to see what is being reported to creditors about them or their businesses. Nav also offers both business and personal credit monitoring.
2. Make sure your credit reports are accurate
Part of your credit report includes data from public records about your business and may not be correct. Additionally, you’ll want to make sure the credit accounts reflected on your reports are accurate too. Fortunately, the bureaus are motivated to provide the most precise information about your business possible. Therefore, if you can validate an error in your reports, it can be fixed. It might not happen overnight, but there is a process for correcting errors.
3. Make timely payments
The single most important thing you can do to improve your credit profile is to make timely payments. This won’t fix a weak profile overnight, and it takes a little longer for this to work with personal credit. However, consistently making payments on time will eventually improve your personal credit score. The same is correct for business credit, but it won’t take as long. Business creditors are looking for more positive notations than negative notations in your credit file. Therefore, as soon as you reach that point, you will start to see your business credit profile improve.
4. Use personal credit for personal needs and business credit for business needs
Even if you pay off the balance every month, the higher balances can hurt your personal score. Especially if you use your personal credit cards to pay for business expenses, for example. That’s true even though your personal credit factors into business creditworthiness decisions. What’s more, it’s just good practice to make the separation.
For a small business owner, one of those things that require your attention is your credit profile. With that in mind, as you improve your business credit scores, you can’t afford to ignore your personal credit score.
Be aware, though, that this is one of those times when slow and steady wins the race. There is no quick fix for a less-than-perfect credit profile. The credit bureaus won’t reward gimmicks like shifting balances around from one credit account to another—it will eventually hurt you. What they will reward is a regular and systematic improvement over time.
Good For Lenders And Good For Business Owners
The FICO SBSS score is one of those things that is good for lenders and business owners. It allows lenders to make better-informed decisions about potential business borrowers. It also paints a fuller picture of a small business’ financial health. Overall, this enables positive outcomes for more small business owners.
Written By: Ty Kiisel – Ty has been writing about small business and the business finance topics that impact a business’ bottom line for almost 20 years. With over 35 years in the trenches as a Main Street business evangelist, author, and marketing veteran, he makes the maze of small business finance accessible by weaving personal experiences and other anecdotes into a regular discussion of some of the biggest challenges facing small business owners today.