If you're good about keeping your personal and business finances separate, you may think that the only credit score you have to worry about is your own. While maintaining good personal credit is certainly important if you're applying for business loans, you may not realize that your company has its own credit score — and it's just as essential to monitor.
"Businesses in the eyes of the law are treated like people," said Jeff Stibel, CEO of Dun & Bradstreet Credibility Corporation, which provides credit-building and credibility solutions for businesses. "The smallest businesses tend not to incorporate or get a credit file, so they [think they don't] have a credit score. Whether you're proactively trying to get your score or not, it's very likely that you still have one."
Stibel said that there are tens of millions of credit files that closely correlate to most registered businesses in North America. His company sees those credit files, and they're often very thin and ill-suited to a growing business's needs, especially if a company is looking to expand or establish partnerships with other businesses.[6 Tips for Managing Your Business Finances]
"[A business credit score] is different from your personal score in that it only looks at business [transactions]," Stibel said. "It's a critically important thing. You want people to rely on your business credit."
As with your personal finances, there are numerous factors that contribute to your business's credit score. Brian Manson, credit manager at business financing firm Balboa Capital, named late or slow payments, defaulting on a loan, judgments, bankruptcies, identity theft and related fraudulent activity as common factors that can negatively affect your score. Making timely payments to creditors and keeping your debt financing down, on the other hand, will improve your score over time, Manson said.
"Improving your score is aligned with building your business," Stibel added. "[Achieve] consistent, predictable growth by expanding, paying [loans] back, and using credit in a fiscally responsible way."
One critical reason for knowing and managing your business credit score is that it helps you keep your personal and company finances well-separated. Manson advised business owners to structure their companies as a corporation or LLC to actively ensure that your credit profiles remain separate. Relying on personal credit for your business could not only hinder your future options for securing financing, but also leave your personal life in ruins if something goes wrong.
"Relying on personal credit means you're on the hook personally," Stibel said. "You can lose your house and your kids can get pulled out of college if your business fails."
Both Stibel and Manson noted that taking a proactive approach to your business credit is the best way to ensure that it stays strong.
"Business owners should review their credit profiles from time to time to make sure everything is in order," Manson told Business News Daily. "Also, fulfilling the basic business requirements can put them in a better position for credit approval. Having a business phone line, business license and business plan can help a company's credit worthiness."
"Know your credit score, how it's impacted, and what you can do to improve it," Stibel said. "Proactively manage it and make sure the data credit bureaus have is accurate and up to date."
Originally published on Business News Daily.