Why Small Business Owners Should Keep an Eye on Their Personal Credit Scores - And How

Sure, most small businesses have business credit that is separate from their personal credit, including a separate credit card, checking account, and savings account. This separation is good, but doesn't mean that small business owners can disregard his or her personal credit score.

Here's why: even if your business is doing amazingly well and you think you'll never have to take a loan out for anything down the road, there may come a time when you will have to rely on taking out a loan in order to improve your business, pay back an unexpected business debt, or otherwise.

In many cases, lenders not only want to take a look at the financial history (including credit history) of a business, but they will also be keenly interested in the personal financial histories of the business owners, principals, CEO, and even board members, in some cases.

Depending upon how your business is organized (which is consistent with its tax filing status), the financial history of the leadership team could be more or less important. For example, if you are a sole proprietor, your personal financial history is intimately tied with the financial history of your business. In fact, while it is recommended that even sole proprietors use Employer Identification Numbers (EINs) for their taxes, many small business owners only use their Social Security Numbers - and this practice is completely acceptable by the IRS and lending institutions.

On the other hand, for businesses that are organized as a corporation, there is generally more organization within the leadership team. The corporation may be jointly owned and operated by more than one person, including a board. Lenders are interested in learning about the leadership team so that they can determine the risk level of lending money to the organization.

For assurance of an organization's financial "intelligence," the lenders may wish to see the credit information for the leadership team. The leadership team, after all, is most often legally responsible for all activities that affect the business, including repayment of loans and bankruptcies. For this reason, many leaders have their own insurance policies to protect them in the event of a financial loss or lawsuit.

So, as a small business owner, how can you improve your credit score so that your business can be in a better position to receive a loan, if necessary? First, it's important to understand what comprises a credit score. Here's how your credit score is broken down:

• 10% New credit

• 15% Length of credit history

• 35%Payment history

• 10% Types of credit used

• 30% Amounts owed

Also, it's important to be aware that the way lenders regard credit scores has changed. In the old days, the standard for the best credit score was anything over 680. Now, the standard for the best credit score is anything over 720.

It's important to check your credit report at least once a year. Make sure you get reports from all three credit bureaus, as each bureau may have a different score for you and have different information regarding your credit history. If your credit score is less than it should be, make sure that all of the information in your credit report is accurate and dispute any inaccurate items.

Finally, to improve your credit score, focus on the things you can change. You may not be able to change some aspects, such as the length of your credit history. However, if you have debt, it may be wise to begin paying those debts down faster than you have been. Try to reduce the number of debts you have as well.

For example, if you have more than one credit card, combine those cards into one so that you just have to pay off one credit card. Avoid opening any new credit cards just before going in to ask for a loan as well to improve your credit score and chances of getting the loan you need to meet your business goals!

Sources:

https://www.usaa.com/inet/ent_utils/McStaticPages?key=2007_07_Credit_Score

http://taxes.about.com/od/taxplanning/a/incorporating_2.htm

http://www.entrepreneur.com/money/paymentsandcollections/article76886.html