What’s the Difference Between a Personal and a Business Credit Score?
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Credit scores are important in the financial world because they are regarded as a proxy for the character of the borrower. Setting aside the discussion of whether this is a fair or always an accurate way to assess such an important characteristic, the reality is that credit scores are entrenched in the business world and they matter.
Lenders, whether banks or community lenders like CEDF, look toward personal scores first because, commonly, small businesses are owned by one individual. The business is the owner, and the owner is the business in a sense. Without getting into the details, personal scores are established through various kinds of formulas tailored to different areas of emphasis of different kinds of lenders. The three major credit bureaus gather information and generate personal scores primarily using consumer lending transactions.
Business credit scores, on the other hand, which are not regulated under consumer lending laws, are based on voluntary reporting of business’ credit performance by vendors who, in turn, need to buy business credit scores to make their own decisions about extending trade credit. For example, a contractor buying frequently from a supply house might aspire to be able to pay on terms, such as Net 30. Their fidelity in paying on time will be reported back to the organizations that provide this tracking which establishes the business’ score.
However, in some industries, such as a mental health counselor, there’s no trade credit because there’s nothing to buy on terms. So, it becomes harder to establish a business credit score. Community lenders, thus tend to have more clients whose business credit scores are irrelevant, whereas banks might deal with more loan customers where it is important.