Your personal credit score is very different from the business credit score and usually does not affect each other. Both the scores are calculated on the basis of different sets of parameters that are followed by the RBI regulated credit bureaus like CRIF. The range is also very different from each other. If that makes you think that both the paths will never cross each other then here’s the answer to it, ‘NO’ that is not true especially if you own a small business.
For most small business owners, the need to build and maintain a good personal credit score never goes away. Although it’s true that some banks and lenders tend to weight the value of your personal score higher than others when they evaluate your business loan application, most lenders include a review of your personal credit score when they evaluate your business’ creditworthiness.
When you set up a business and create a certain corporate structure, you assume your identity and the identity of the business that is created will be different from one another. However, for a small business, the founder is often the face of the business. This means lenders would take a close look at your personal finances to arrive at a decision.
Why do you need a credit score?
Credit scores a three digit number calculated by credit bureaus like CRIF determines your financial stability and credibility. It ranges from 300 to 900 where below the 700 is considered to a bad credit score. It is used by banks to make a decision regarding a loan application or a credit card application. A bad credit score depicts your repayment irregularities and bad credit behaviour which leads to the refusal of loans and credit. A credit score is also used to determine the rate of interest where a good credit score can fetch you lower rates of interest while a bad one can give you a loan with high interest rates.
What is the difference between Personal and Business Credit Score?
Personal Credit Score is the credit score an individual has, showing his financial credibility. The parameters on which it is calculated are various financial activities including repayments, bill payments and maintaining credit accounts, mainly. Business Credit Score is the credit score that the business will have and some of the parameters on which the score is calculated are profits of the business, turnover of the business, financial activities of the business and many such details of the business that determines the credibility.
Types of Businesses where PCR can affect a business loan:
In company law, there is a concept of lifting or piercing the corporate veil. While it is used when cases of fraud and impropriety are being decided and where the rights, duties and liabilities of a company become the rights, duties and liabilities of its shareholders, lenders often decide to follow a similar path. It is seen in many cases lenders specifically want to know the track record of the business owner, thereby treating the company and the owner at an almost equal footing. So which forms of business does your personal score start impacting?
● Sole Proprietorship: These are most vulnerable to damage due to proprietor’s low credit score. In a sole proprietorship, the business and the owner are the same. Here, the business and owner share one credit score.
● Partnership Firms: When it comes to partnership firms, the credit score of all partners is checked. If things are not upto mark post credit checks then the loan could be available to the business at a higher rate. The business may or may not be able to afford costly debts and therefore this again becomes a reason that would impact the growth negatively.
● Private Limited Companies: Banks check the credit background of all the directors of the company. When credit scores are not meeting lender’s standards, once again either the loan application can be rejected or the loan would be available at a higher rate of interest.
Quick trivia for the business owners who have just embarked on the journey towards expanding your business or starting something of your own, make sure your personal credit score is on point as it will help you get your funds from the banks and lenders. to know about the difference and how each score has its own way of coming together, read more on CRIF Blog about how to build and maintain personal and business credit score.