By John Ulzheimer
The Ulzheimer Group
So you want to start a business. Congratulations, you’re one of the roughly 600,000 people each year who take the leap from employee to employer. And while you’re writing your business plan and looking at office space there’s one more thing you’re going to need to consider…financing. Unless you are independently wealthy you’re likely going to need to borrow money in order to fund your business operations.
You have a variety of options in order to fund your business. Some are better than others. You can borrow money from friends and family, you can use your own personal funds, or you can attempt to take out business forms of credit. There are success and failure stories for each of the options. One thing is certain, though. You’re likely going to have to become very familiar with the differences between consumer credit scores and business credit scores.
The Data That Drives The Scores
Consumer credit scores consider information on your personal credit reports. Those are the reports maintained by Equifax, Experian and TransUnion. Only your personal credit obligations, those that actually appear on your credit reports, influence your personal credit scores. Your mortgage loan, your personal credit cards, your auto loan and your student loans probably are all appearing on your credit reports, at one or more of the national credit bureaus, and will have some influence on your personal credit scores.
Business credit scores do not consider information on your personal credit reports. They do, however, consider information on your business’s credit reports. What’s on your business credit reports? Your business liabilities and how well you manage them. For example, the vendors and suppliers your business uses can report how promptly you pay them. They can also consider if you go delinquent or default on your business liabilities.
The Score Ranges
An easy way to tell the difference between a consumer credit score and a business credit score is the actual numeric deliverable. Most consumer credit scores have settled on a standardized range of 300 on the low end to 850 on the high end, with the high end being the lowest probability of default prediction. While there are some limited exceptions, all consumer credit scores will fall somewhere in that scale.
Business credit scores do not follow the same adherence to the 300 to 850 range. For example, Dun and Bradstreet’s PAYDEX® Score, a commonly used business credit score, has scaling of 1 to 100, with a lower score representing elevated business credit risk. Experian’s business credit scores also range from 1 to 100. However you’ll have to a pay a little closer attention if using the Commercial Insight Delinquency Score from Equifax which predicts the likelihood of a business incurring severe delinquency, charge-off or bankruptcy with a score ranging from 300 to 1500.
While this wasn’t the intent when the various score developers set the ranges of their respective scoring systems, the inconsistency between consumer and business score ranges helps to avoid confusion among score users. For example, if I told you your score was 785 you would know, instantly, that I’m referring to your consumer credit score. If, however, I told you that ACME Incorporated had a score of 87 you would know that I’m referring to ACME’s business credit score.
Consumers enjoy a variety of rights as it pertains to their personal credit scores. For example, you have the right to see your scores when you apply for a mortgage loan. You’ve enjoyed that right since 2003 – most people don’t know that. If you dig through your closing paperwork you should find a document titled “Credit Score Disclosure Notice.” That Notice will include the credit scores your mortgage lender or broker accessed when you applied for your loan.
Consumers also have the right to see the exact credit score that was used by a lender in the unfortunate cases when credit has been denied. This will accompany something formally referred to as a Notice of Adverse Action, which we more informally refer to as a “denial letter.” Not only do you have the right to see the actual score used by the lender but you also have the right to additional information such as the scoring model’s range and where you fall in the national distribution. You don’t enjoy any of these aforementioned rights with business credit scores.
When Personal Credit Scores Impact Business Credit Applications
There’s one last thing you should keep in mind. If you apply for business credit and you are asked to agree to what’s called a “Personal Guarantee” then you are pledging your personal credit reputation to the business lender. And, when you sign a personal guarantee you will allow the business lender to not only access your personal credit report or reports, but also to access your personal credit scores rather than your business credit scores.
Business lenders may do this if you are a newly formed business and have no business credit reports upon which to base their decisions. They will default to your personal credit information instead. If they do this the lender will also likely hold you personally liable if the payment on the debt isn’t made. This will allow them to report negative information to your personal credit reports and pursue you, personally, for the collection of the debt.