Business

Funding requirements are cyclical not only in business but also in personal life. As an entrepreneur, you should be aware that the company is recognised as a separate legal entity. It means that during a default, when a liquidation condition arises, your business assets are at risk, not your personal ones.
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Financial institutions offer different products for commercial and household use. These products have distinct eligibility, documentation, and credit score requirements. When you apply for a credit for personal purposes, your personal credit score is considered. But if you apply for a credit for business purposes, then your business credit score is considered. Both these scores are distinct.
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Read on to know the key differences between business credit score vs personal credit score.
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Difference between Business Credit Score and Personal Credit Score

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To understand the distinction, you must first learn the meaning, composition, and various ways to improve this score.
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What is a Personal Credit Score?

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A personal credit score reflects your financial ability to repay debts. The score ranges from 300 to 900. The credit bureau determines this score after gathering your financial data from various noted institutions such as banks, NBFCs, and insurance companies.
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In case your credit score is strong enough, getting adequate funding at an affordable rate is no big task.  
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What forms your credit score?

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Credit bureau considers the following variables to decide on your credibility. 
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1. Payment history

   It is critical to consider your previous and ongoing repayment behaviour. Your credit score will be low if you have previously skipped EMIs on your used car finance or personal loan. Remember that your payment history accounts for 35% of your overall score.
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2. Borrowed Amount

   It may be difficult to repay all of your loans if you have multiple on-going loans. Credit bureaus view excessive credit usage negatively and lower your score accordingly. It is critical to remember that this factor accounts for 30% of your credit score.
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3. Credit Length

   The length of your loan term has an impact on your credit score. If you choose a long-term loan and pay all your obligations on time, your credit score will improve. Credit length accounts for approximately 15% of the credit score.
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4. Credit Mix

   A credit mix refers to a loan portfolio that includes secured and unsecured financing. If you have an unsecured loan, such as a personal loan, and a secured loan, such as a loan against property, your chances of having a good credit score are good. It contributes 10% to your credit score. 
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5. New Credit

   When you get a new loan, the newly opened credit affects your credit score by 10%.
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How can you boost your credit score?

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• Automate all your debt-related payments. This ensures that the portion of your income designated for EMI payments is not diverted elsewhere.
• Keep track of your credit card payments. If you have a credit card with a limit of Rs 1,00,000, regularly using more than 30,000 (over 30%) will affect your credit score negatively.
• Opt for loan foreclosure even if it means paying penalty. Early closure of your loan demonstrates strong repayment potential and improves your credit score.
• If you have a bad credit score, you can improve it by taking out a consumer loan and repaying it on time.

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Also Read: Can A Personal Loan Help You Improve Your Credit Score?
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What is a Business Credit Score?

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A business credit score is nearly identical to a person's creditworthiness. The business stability and debts associated with your company are considered here. If your company has a poor reputation or you have recently established a new company with no prior credit history, the business lender views you as a risk applicant and denies funding.
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What forms your credit score?
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1. Business Vintage

   The year of establishment matters equally for credit bureaus and lending institutions. The concept is the older your company, the higher is your business credit score. In the context of a business loan, the lender requires that your company be at least five years old in order for the loan to be approved.
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2. Past Debts

   The number of debts you applied for in your company's name in the last nine months affects your business credit score. Furthermore, if you apply for a new loan, the lender will request your credit report from the bureau. The process is known as a hard enquiry, and having too many of enquiries erode your credibility.
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3. Liens

   If you have defaulted on a loan within the last seven years and the lender has taken legal action against you, then this will hurt your creditworthiness. Furthermore, the consequences can last up to ten years if your company goes bankrupt.
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4. Debt coverage ratio

   It denotes the portion of your company's revenue that has been used to repay debt. The lower this ratio, the higher your credit score.
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How can you boost your business credit score?

• Avoid relying on business credit cards. If the utilisation of your business credit score exceeds 30% of the available limit, then it may lower your business creditworthiness.
• Make an effort to improve your company's cash flow. The greater your cash inflow, the better your business liquidity and the lower the likelihood of EMI skips.
• Avoid submitting too many business loan requests at the same time. The credit bureau will view your company as unstable.
• If the loan EMIs from lending institutions cause your debt coverage ratio to exceed 50%, consider raising funds from other sources, such as angel investors or private equity.

When do you require a decent personal loan for business financing approval?

There are various instances when the lender gauges your personal credit score while approving funds for business purposes. These include.
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• If you apply for a personal or mortgage loan with the intention of using the borrowed funds for commercial purposes, your personal credit score will be prioritised.
• An individual credit score is vital when you are a start-up with no credit history and applying for a government loan scheme.
• When you own a small business that is classified as an MSME, your personal credit score is critical.
• Personal and business credit scores become crucial for loan approval if you are a sole proprietor or self-employed professional.

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Also Read: STEP BY STEP GUIDE FOR CHECKING YOUR CREDIT SCORE
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Conclusion

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Regardless of the type of loan product, your credit score is extremely vital. If you own a business and need money for it, you must ensure that both your personal credit score as well as your business credit score are excellent. It is always good to maintain high credit scores as it impacts many different facets of your finances.