Personal vs Business Credit Score: What’s The Difference
Today, financial organisations offer different types of loans catering to the specific needs of individuals and business entities. These loans have distinct eligibility criteria, documentation processes, and credit score requirements. When you apply for any kind of loan for your personal purposes, financial organisations will consider your personal credit score to determine your eligibility. Similarly, if you apply for a credit for business purposes, then the lenders will take into account your business credit score or rank.
While both business and personal credit scores may seem similar on the surface, they are quite different from each other. In this guide, we discuss the difference between business and personal credit scores. Read on!
What is a personal credit score?
A personal credit score is essentially a three-digit number ranging from 300 to 900. It is a reflection of your creditworthiness and ability to repay debts in your personal capacity. The credit bureaus determine the score based on credit data gathered from different financial institutions.
If your credit score is high, i.e., more than 700 and closer to 900, financial institutions may consider you a risk-free borrower, and you may have better chances of getting the loan approval at an affordable interest rate.
The credit bureaus consider the following factors to determine your personal credit score:
• Payment history
If you have repaid your loan EMIs (equated monthly instalments) and credit bills on time in the past, it will reflect your good personal credit history. Also, such responsible financial behaviour will help improve your credit score.
• Loan tenure
The tenure of the loan you avail yourself of has a significant impact on your credit score. If you avail a loan for a longer term and repay all the EMIs on time, your credit score will improve over a period. The credit term accounts for 15% of the credit score.
• Credit mix
Credit mix refers to the loan portfolio. And if you have a good mix of secured and unsecured loans in your portfolio, like personal loans, home loans, etc., your chances of having a higher credit score would be higher.
What is a business credit score?
A business credit score is a reflection of your business entity’s creditworthiness and financial standing. Here, the business stability and debts associated with the company are considered to determine the business credit score.
If your enterprise has a poor reputation of defaulting on payments or has filed for bankruptcy, the financial organisations may view your business as a risky business and reject your loan request.
The credit bureaus consider the following factors to determine business credit score:
• Business vintage
Business vintage refers to the number of years your enterprise has been taking and retiring debt. The older your organisation is, the better the chances of the business credit score being high. In the context of a business loan, most lenders prefer extending loans to enterprises that are at least five years old; this will help improve your chances of getting loan approval without any hassles.
• Debt repayment history
The number of credits you have availed for your business enterprise in the last nine months has a direct impact on the business credit score. Additionally, every time you apply for a new loan for your business, the lending organisations will initiate a hard inquiry into your business’s credit standing and request a credit report from the bureaus. Having too many inquiries within a short time may affect your credibility.
• Credit Utilization
Higher utilization percentage on working capital limits is often an indicator of financial stress that a business entity is going through. This might negatively hamper an entity’s credit score or rank.
• Adverse Information
If you have failed to repay your loan in the last several years or any lender has initiated legal action against your business entity for defaulting, or your business entity has been tagged as a wilful defaulter, or certain credit facilities have been written off, then it may affect your business creditworthiness and credit score in a negative way.
Conclusion
The key difference is that your personal credit score indicates your ability to repay your EMIs and credit card bills, whereas the business credit score or rank indicates your business entity’s ability to repay its credit facilities. No matter the type of loan you are applying for, be it for personal or business purposes, your credit score is vital. It is a good practice to get a business credit check report and review it carefully to understand your business’s current rating, and you can make an informed business loan borrowing decision.
If you own a small business enterprise that comes under the MSME (micro, small and medium enterprise) category, it is better to maintain good personal and business credit scores as they may impact different aspects of your finances.
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