Before borrowing money, business owners should understand the differences between their personal and business credit scores, and how business credit scores work.

I recently had the opportunity to discuss these issues with Levi King the co-founder of Lendio, and most recently, the co-founder of Creditera. Lendio is a firm that matches small business owners with lenders. The goal of his new company, Creditera, is to help more companies qualify for financing and get better terms when they do qualify.

Levi estimated that only 5% of those coming to find financing through Lendio qualified for a prime loan, like an SBA 7a loan. Another 35% of small business owners looking for credit qualified for a sub-prime loans. The remainder did not attract the interest of traditional or alternative lenders.

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The following questions and answers are based on my notes from a phone call with Levi King.

How Business Credit Scores Work

How do the consumer credit bureaus differ from the business credit bureaus?

Levi King: There are three main credit bureaus on the consumer side: TransUnion, Equifax, and Experian. However, they all draw upon [very similar data sets] the same data set to calculate a person’s credit score. While the scores will vary some from one credit bureau to another based on their proprietary algorithms, a person can have a very good sense of their personal credit standing by looking at one credit report. That’s why Credit Karma can offer an amazing product with just a one bureau score, report, and alerts solution.

This is not true with regards with to business credit bureaus. Dun & Bradstreet (D&B), Experian, Equifax, Paynet and others, all draw on very different data sets, and can have very different credit assessments of a company.

Interested in improving your business and personal credit scores? Try Creditera

Do the different credit bureaus serve different purposes?

Levi King: Yes. Dun & Bradstreet is the 800 pound gorilla in the area of trade credit [and government contracting]. Banks and credit units tend to use Experian and Equifax with greater frequency than D&B from our experience. Paynet has substantial data with regards to leasing.

What is a good credit score with the business credit bureaus?

Levi King: With Dun & Bradstreet’s PAYDEX credit score which has maximum score of 100, 80 is a good score. Each business credit bureau has a different scoring system. Experian also has a zero to one hundred rating system, however, on that one 70 is a good score. Unlike on the consumer side, there is little consistency to the meaning of a score from one credit rating agency to another.

Is there other differences between between business and consumer credit reporting?

Levi King: There is a big difference when it come to disputes. Unlike a consumer credit report, the burden of proof for correcting any mistakes on a business credit score lies with the business. The FCRA does not extend its protections to business owners related to their business credit.

When and how do personal credit scores play a role in getting business credit for small businesses?

Levi King: In most cases, lenders are going to be looking at both the company’s and the business owner’s credit histories. Oftentimes the lender isn’t as concerned with the business score as they are the content of the report, making sure it is void of delinquencies. There are few exceptions to this, like equipment financing where it’s possible that an equipment lease gets approved absent personal credit. With bank or credit union loans, the lender is always going to rely on a personal guarantee to secure the loan in the case the business cannot pay. The perceived value of the personal guarantee as security, is going to depend heavily on the business owner’s credit history.

With other types of lending like trade credit, the lender will first look at the business’s credit history. If the business does not have a strong, long credit history, the lender will ask permission to look at the business owner’s personal credit history and score.

Many alternative finance companies say they don’t look at personal credit scores to make decisions this true?

Levi King: While many alternative financing companies say that they don’t use the business owner’s credit score to qualify for their products, they will in fact look at the business owner’s credit history for events to disqualify a business from receiving financing. Events in the business owner’s past, such as a recent bankruptcy, tax liens, and legal judgements are often used in deciding not to provide credit. What they really mean is that they don’t use personal credit as the primary risk underwriting data set, rather as a secondary data set.

What is the FICO Liquid Credit SBSS, also known as Small Business Scoring Service?

Levi King: The FICO Small Business Scoring Service (SBSS) is used by many banks [banks, credit unions, and non-bank SBA lenders] to evaluate business loans under a million dollars, and used as a filter to get faster SBA loan guarantees where the loan amount is $350,000 or less. The FICO SBSS goes from 0 – 300. To get an SBA loan guarantee the minimum score is 140, but most banks will not make loans, even SBA guaranteed ones, to businesses with a score below 160.

FICO SBSS provides a solution to evaluating businesses with limited credit history, it blends data from the business and the business owner’s credit history. The personal credit history can account for 50 – 90% of the score, the businesses credit score is up to 40%, and the financials of the company can be up to 10% of the score. It’s up to the bank or lender to pick which credit bureaus to include in computing the score but a minimum of one personal credit report and score is required.

Where have you seen companies be rejected for credit, when they should have been approved?

Levi King: Lenders often have different risk models based on which industry a company is in. Mistakenly being placed in the wrong industry by a lender, which is not uncommon, can have a major impact on receiving credit. For example, a company which makes signs for real estate companies could be placed in the real estate brokerage category, instead of being categorized as a sign manufacturer. As real estate brokerages are considered higher risk than manufacturers, the company could be declined credit as a result. Companies should make sure that they have the right Standard Identification Code on their credit reports.

Interested in improving your business and personal credit scores? Try Creditera

Levi King, Founder and CEO, Creditera

Levi King is the CEO of Creditera, the industry’s first online platform that lets small business owners access valuable insights from both their personal and business credit via real-time monitoring, reports, scores, and ongoing alerts. With nearly 20 years of entrepreneurial and financial technology experience, Levi has started successful businesses in the manufacturing, hospitality, retail financial services, and franchising spaces. Prior to founding Creditera, he started Lendio, a matchmaking service that links commercial lenders and small business owners.

Need some money for your business? Click here to get our FREE Guide:
How to Get a Small Business Loan.