Majority of small business owners and entrepreneurs depend on debt financing to get started with their business. Knowing the basics of how debt financing works is a must. With the right knowledge of debt financing you will not waste your energy, time and other resources going after the options which either will not suit your need or are not achievable in your case.
The documents and other requirements relating to personal and business play most important role in securing the finances you need. The documentation and other requirements differ in the case of personal and business credit. So one must know what to do in each case. To make the topic clearer for you, let’s start with defining both types of credit scores.
Personal credit score
Your personal credit score define your ability to pay back your personal loans. This is your creditworthiness. This describes how you have been dealing with your personal credits. The value of your personal credit score is a number which helps the lender to evaluate whether he can offer you credit safely or not. It helps lender set an annual rate as your cost of fund (ARP) on the amount lent to you. It also makes evaluation ground for the lender for other requirements like whether to take collateral or not. Credit score is important because if you have a higher credit score your lender may lend you money on lower interest rate, not require any collateral and set an easy installment schedule. This is your personal trustworthiness.
Determinants of your personal credit score
Your social security number with your credit history are the factors to determine your credit score. The bodies that determine these score are the credit bureaus using all variation of Fair Isaac Corporation (FICO) score. The score ranges from 300 to 850 and is composed of five following components:
Your payment history accounts for the 35% of your credit score. It is very important for you to have a clean payment history with no or least late payments. Your timely payment is the first things your lender will consider when giving you loan. The amount you owe constitute 30% of your credit score which makes it a significant factor for you to take it into consideration.
The next determinant of your credit score is the length of your credit history. This constitutes 15% of your credit score. The higher the length of your credit history the higher the score. Your credit mix in another factor to determine your credit score to 10%. This includes your credit cards, car loan schedule etc. Several credit accounts determine your score to 10%. Different fresh credit accounts increase your credit risk hence lower your credit score.
Business Credit Score
This is your business ability to pay back the borrowed amount in time and properly. It is your commercial credit score. It is considered to determine whether your business is a good entity for financing by means of debt or not. If your business has a high credit score it will be easier for your business to get financing even on lower rate of return, without nay collateral and on easy repayment schedule. It is so because a good credit score increases the trust of lender in your business ability to payback.
In contrast to it a bad business credit score creates much difficulty for your business to get debt. In case the only option you have is debt financing, for your business then you need to be very careful with your business credit score to avoid financial troubles. In addition to debt financing, different businesses check your credit score before invoicing your business as well. It may include the term period of invoicing whether it is Net 30 or Net 60. This means the time whether 30days or 60 days a business trading with is giving for payment of the invoices raised. It means that a good credit score gives you time in payment of invoices as well.
Determinants of your Business Credit Score
The Internal Revenue Service (IRS) and the credit reporting bureaus determine your business credit score. Your Employer Identification Number (EIN), same as your SSN, is a factor for determination of your business credit score your small business must have an EIN and be registered with Equifax, Experian or Dun & Bradstreet then you can proceed further with the business credit.
Equifax uses the history of your business credit, the credit used to the credit available to your business, the term period of your business operations, the location and public records of your business. Equifax scoring of your small business credit ranges from 101 to 992 on the Small Business Credit Risk Score for Monetary Services. It scores suppliers for the Small Business Credit Risk from 101 to 816. Equifax also takes into consideration the small business owner’s personal credit score into account as well.
Experian considers the factors same as those considered by Equifax. The scale ranges from 1 to 100. Experian considers the data from lenders and merchandizers that have a prolonged credit line or loaned money to your business. Experian compares all of that data to the competitors in your industry.
Dun & Bradstreet uses a 100-point scale to scale your business on the credit score scale. It focuses on the single year payment history of your business with a financial stress score and other data from at least four vendors, Dunn & Bradstreet’s PAYDEX report to rank your business credit score.