January 3, 2013

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Your company’s credit can be scored in several different ways:

1. Objective financial performance – Banks and other creditors will ask to see your tax returns or a balance sheet and income statement. The financial data is computed to find a statistical likelihood that the company will default.

2. Payment histories – Some commercially available credit scores use your relationships with vendors to establish a credit score.

3. Community scores – A more formalized system for references, this type of credit score is established when a community votes on how the company’s payment performance has been in the past.

Combined or Global Credit Scores

In order for your small business to gain access to bank loans and other financing, it is important to maintain good personal credit as well as business credit.

As the CEO  and, therefore, guarantor of the loan, your personal credit history will have an effect on the success of your business loan applications and the interest rates you are offered by banks, credit card companies, and other issuers of credit.

When applying for a business loan, your bank may look at both your business’s financial history and credit ranking as well as your personal credit score.

Several new models of assessing a business’s creditworthiness have recently been developed.

The Sageworks Business Credit Report, for example, determines a business’s creditworthiness using a statistical model that predicts the probability of default, and it incorporates both the business’s and the business owner’s financial position. By analyzing the financial records and historical behavior of over 4,000 small- to medium-sized businesses, they can predict how likely a business will default on a loan.

You can run this report on your own business so that you know, in advance, how a bank or other creditor will view your business loan application.

Connect with Sageworks on Twitter.

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Photo: Massimo Dutti

Megan Webb-Morgan contributed to this article. She is a web content writer for Resource Nation and writes about small business, focusing on topics such as business sales. Follow Resource Nation on Facebook and Google+, too.

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