As a business owner, you may require additional finances to run your company. At times, you may also need funds for personal use. In both the scenarios, the financial institutions will check a few factors before approving and disbursing an amount. For a business loan/credit card, the lender will check your business credit report and score. For a loan to manage personal expenses, the creditor will check your personal credit report and score. Both the types of credit reports look into your financial histories, yet differ from each other in more than one way.
It is advisable to keep your personal and business finances and dealings separate. This can help in more than two situations. Firstly, it assists to keep an account of the business’s tax matters separately than that on individual/personal income. Also, it will keep your personal assets safe from being taken over by the creditor in case of a loan default.
In this post we will discuss what is a credit, credit report, credit score, and leading credit bureaus. We will then throw light on the differences between a personal credit score and business credit score.
What is a Credit?
Before understanding the differences between personal credit score and business credit score, it is crucial to know what is credit. Basically, credit is the money you borrow from a lender. And you have to pay back the principal amount you borrow. Along with the principal borrowed, you will also have to pay the interest and fees within a given time frame. There are different types of credits as discussed below:
- Instalment Credit: This is a fixed loan, wherein you agree to pay the financial institution a fixed payment in a periodical manner over a set duration. The instalment is usually monthly. But, the frequency of instalments may differ.
- Line of Credit: This is a revolving line of credit. The provider sets the limit for maximum credit allowance. You are liable to pay charges/interest based on the credit you use from this specified limit. You should pay the monthly bills to reduce the accrued balance. Here, you have to make a minimum monthly payment. But it is best to pay off the entire due amount to save being subjected to additional charges.
- Trade Credit: Here, you can buy goods on a loan from the vendor or supplier. You can then pay the dues to the vendor after the delivery of goods. You may even pay on a later date, as agreed between the concerned parties.
What is a Credit Report and Credit Score?
Here are the details to know:
- Credit Report: A credit report is a detailed account about how you handle the past and ongoing credits. The information includes the types of loans and credit cards taken, payment history. The constituents of a Company Credit Report are different than that of a Personal Credit Report. The credit bureau then assigns a credit score based on this information. This score is a rating that talks about your/company’s creditworthiness.
- Credit Score: The range of a credit score in India is between 300 and 900. A credit score is variable. It means, the score may change from time to time depending on your payment/financial behavior. Higher the credit score, greater are your chances of getting a loan approval, and vice-versa.
- Credit Bureaus: The credit bureaus only prepare the credit reports on the basis of information provided by lenders/financial institutions. They do not have a hand in taking decisions on a credit request. You need to regularly check your credit report (say once in a year). This will allow you to stay updated about your credit profile. If you notice any error in the Company Credit Report, then you can get in touch with the respective credit bureau. Then you can request for the correction of errors.
Here are the credit bureaus that you may approach for a credit report:
- TransUnion Credit Information Bureau (India) Limited or CIBIL
- CRIF High Mark
- CRISIL (Credit Rating Services of India Limited)
- ICRA (The Information and Credit Rating Agency)
The credit report from each bureau will differ in range of credit scores, the information in the report, etc. Also, the creditors may not request for the report from all the credit bureaus, but perhaps just one. Remember that whenever you apply for a loan, the lender will access your credit report. Then the potential lender will analyze your creditworthiness based on the information in the credit report.
Here is the information that a credit report may contain:
- Personal information such as your name, date of birth, social security number, address, etc.
- In case of a business credit, information such as the company name, date of establishment, tax ID, address, etc will be taken into account.
- Inquiry information (hard inquiry or soft inquiry). A hard enquiry is when a potential lender accesses the report. A soft inquiry is when you check your own credit report. The latter does not impact your credit score.
- Type of credit account, for instance – student loan, mortgage, credit card, personal loan, business loan, vehicle loan, etc.
- Credit limit or loan amount, date when the account was opened, account balance, payment history.
- Any past-due account turned over to a collection agency.
- Type of bankruptcy and filing date (if any).
What is a Business Credit Score and Personal Credit Score?
As the terms suggest, a business credit is the money you borrow for business purposes. A personal credit is the money you borrow for non-business use. Usually, the lender considers only your company’s financial transactions to decide about business loan approval. But to approve funds for personal use, it may only check your personal financial transactions. In both these cases, the lender may or may not check the latter to take the decision. No matter which type of credit you choose, you need to pay the instalments/bills on time to maintain a good credit score.
Here are a few more differences between both these credit ratings:
- Personal Credit Score vs. Business Credit Score
A personal credit score signifies an individual’s credibility to take and repay a loan/bill. A business credit score depicts a company’s credibility to do the same. These scores are not linked with each other. However, in a few cases, the creditor may look for both the scores. This is true if the business is small-sized. Here, the company owner’s personal credit score holds an importance.
A) Personal Credit Score
A personal credit score ranges from 300 to 900. It is a three-digit rating that represents your financial credibility or ability to repay the borrowed amount. This score is provided in the credit report, as discussed in the above-given pointers. A score of 700-750+ is considered as a good credit score for borrowing money. For instance, a higher score will make you eligible for a higher credit limit on your credit card. Also, the interest rates and fees could be lower.
On the other hand, a credit rating of 650 or lower may dim your chances of getting a loan approval. Thus, your goal should be to build and maintain a strong credit score. You can do so by paying the EMIs and bills on time. Defaulting or missing the payments will negatively impact your personal credit score.
- Determining a Personal Credit Score: A personal credit score is calculated by taking into account the new credit and credit mix. The weightage for each of these factors is 10%. Thus, it totals to 20% together. Other factors considered are the duration of credit history (15%), amounts you owe (30%), and payment history (35%).
- Paying the Dues on Time: You can boost your personal credit score by making timely payments. For instance, you may have too many ongoing loans or tend to forget the payment dates. In this case, you may give permission to the lender to deduct automatic payments from your credit account.
- Adequate Balance in Credit Accounts: Keep sufficient funds in these accounts so that EMIs can be deducted in full. Schedule the due date of payments in a way that it is timed with the pay-cheque. This way, you are in control of the finances.
- Balancing the Credit Utilization: Keep the credit utilization ratio to 30% of your income. If you have any additional fund in hand, then pay off the entire due amount on highest costing loans, such as credit cards, personal loans, etc.
- New Loan Inquiry: When applying for a new loan, check for the best possible creditor whose eligibility criteria you meet. Also, look for the one whose terms and conditions suit your requirement. This will limit the number of credit enquiries you make. Dropping too many loan applications at a time may impact your credit score. This is because the financial institutions may think you are credit hungry.
- Healthy Credit Mix: A credit mix of secured and unsecured loans leaves a good impression on financial institutions. If you depend on unsecured loans mostly, then it may reduce your chances of getting a new loan. This is especially if your credit score is not up to the expectation. So, try to maintain a healthy credit mix.
B) Business Credit Score
A business credit score ranges between 300 and 900. It depicts a company’s creditworthiness. The score is assigned after analysing the information in the Company Credit Report. When you apply for a business loan, the financial institution uses this report and score. Based on these two factors, it judges the credit behavior and financial stability of the business. A higher credit score means that you stand a better chance in getting the loan approval.
- Determining a Business Credit Score: The factors taken into account to calculate your Company Credit Score are – collections and liens past a few years, number of years in business, new lines of credit, new credit history of the past few months, payment history, and more.
- Small-sized Business: If you are the owner of a small-sized company, then keep a check on your personal credit score as well. Make timely payments on loans taken against or for your business, as well as that for individual use. This will boost your chances of getting a loan approval.
- Business Experience: If your company has been in business for a fair number of years, then you have a better scope of getting a loan. You must have at least 3 years of business vintage. Try to add positive payment history throughout for your business. This will help to win the trust of the financial institutions.
- Company Assets: These days, unsecured business loans are available. Here, you do not have to pledge collateral. However, a few types of company loans may necessitate a security. Thus, you must keep a note of all the company assets. Understand which assets you can utilize to take a loan against in times of an emergency.
- Stable Credit Behavior: Pay your bills and EMIs on time for a consistent credit behavior. Check your business credit report at times. This will assist you to be in sync with the effect of financial liabilities and payments on the credit score.
- Submit the Required Documents: You need to keep the required documents in place to prove the business establishment, vintage, and financial. Some of the papers to put ahead with the loan application are – photographs of the loan applicants, proof of company address, proof of business ownership and vintage, ITR of the recent 3 years, GST of the last 4 quarters, existing loan account statements, audited balance sheet and profit and loss statement, etc.
- When Does a Lender Checks Personal as Well as Company Credit Score?
The financial institution will primarily look into your business credit score and history. It provides information about the business. These details are not present in a personal credit report. At times, the lender takes your personal credit history into consideration. The transactions in the credit report will help determine the loan approval chances, credit amount, interest rate, and other terms and conditions. Here are the following details the bank/NBFC will verify:
- Business verification
- Financial collections
- Billings and transactions
- Public records and data management
To sum it up, you must simultaneously keep a check on your individual and business credit. Ensure both the scores are as per the expectations of the lender to get favorable terms.
A personal credit report gives information about your personal financial transactions (individual loans and credit cards). A business credit report gives information about loans and credit cards linked to your business. In the former, your social security details, and in the latter, your tax ID are used to rate the ability to borrow money and make payments. A credit score is a rating based on either these details. If you are an entrepreneur, make sure your personal credit score and business credit score, both are good. This will enhance the chances of a loan approval.