Score Savvy Business credit scores are on the horizon. Could your personal credit history hurt you?
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By next summer, small businesses should have credit scoressimilar to those already assigned to most consumers. Lenders willuse the scores to size up the credit-worthiness of small businessesthat apply for loans. That's good news for those whose credithistories can be easily summarized in a single number, but itwon't make the loan process any easier for businesses whosecredit histories are more complicated than plain vanilla. In April,the SBA announced it had hired two giant credit informationcompanies--D&B and Fair Isaac--to build credit models based onthe SBA's enormous portfolio of guaranteed loans. The scoreswill operate the same way as consumer scores: the lower the score,the higher the interest rate.
The resulting model, which is supposed to be completed thisfall, will be used to create generic credit scoring templates thatcan be used to sort loan applicants into three piles: automatic"yes," automatic "no" and "maybe--get moreinformation." Jonathan A. Scott, an associate professor offinance at the Fox School of Business at Temple University inPhiladelphia, says borrowers whose credit histories need explainingwill still have to cultivate the goodwill of their lenders and drawon those relationships to seal the deal.
It's up to business owners to monitor the status of theirscores, especially making sure a recently cleaned-up credit historyis reflected in improved scores. Business owners will also have toexplicitly ask about the use of the score in lending decisions."If an applicant asks why they were turned down, we'dexplain the factors, not just show them the score," says JudyDelbovo, senior manager for business lending for Harris Bank inChicago, which already uses its own small-business scoringsystem.
Meanwhile, all the big credit reporting agencies are gettingmuch better about tying small-business owners' personal credithistories to their businesses' payment habits. "Dependingon the size of their firm, there's a clear and compelling casethat how they pay their own bills is reflective of how they paytheir business bills," says J. Dann Adams, senior vicepresident of North American sales at Equifax, one of thecountry's biggest credit reporting agencies.
The upshot: Your personal and business credit histories aregoing to blur together. It won't be long before your personalfinancial habits will directly impact your company's creditstatus.
