Business or Personal Credit - Which one matters in Commercial Lending?

Last week I closed on my first commercial property. I posted about it here. I didn't know what to expect. I promised to go through the process to help someone else be prepared to apply for a commercial loan.

The Credit Lie

Internet Finance Influencers: "You need to build your business credit!" "Buy these tradelines!" They tell you to do all this loop-it-swoop-it stuff to build your business credit. The goal, they say, is to be able to get ‘funding’ for your business. 'Funding’ is a loan. They make it seem that you NEED business credit to get a business loan. People went out and bought cars in their business's name, with absolutely no need to do so. People got random credit accounts with gas cards and supply stores, and for what??

During the active Covid years, I heard of lenders providing business loans with a credit score as low as 500. Money was free-flowing during Covid. With all the stimulus money and low interest rates, money was ripe for the taking. The banks needed to make money! Finance influencers (with no professional training) were certainly making money hand over fist, deluding their followers into that obtaining commercial credit was a simple task. During Covid, it probably was. Now that we’re post-Covid, things are a lot different.?

What's your Credit Score?

When I first spoke to my lender over breakfast, he seemingly squirmed in his chair, as he asked me, “Is your credit score at least 650?’?

“Yes”.??

He didn’t ask for my Paydex score (an indicator of past payment history). He didn’t ask for my DUNS number. He asked about my personal credit score.?

Edited to add for clarity:

I applied for this loan as a business, with an LLC and 7 years of business history. It was not applied for as a personal transaction.

Back to the regularly scheduled programming...

Which Credit Score?

There are two sets of scores used to determine your creditworthiness -? your credit score and your FICO score. Your credit score? is provided by the three major credit bureaus - Equifax, TransUnion and Experian. Scores provided by these agencies are three digit numbers that determine how well you manage credit. A higher score means you use your credit, and pay it back in a timely fashion.?

These agencies produce a credit report that gives your name, address, social security number, and date of birth. It also lists existing credit accounts; any liens, judgments, or bankruptcies, and it also lists any inquiries that have requested your credit score. Credit scores and reports are updated monthly.?

The FICO score is provided by the Fair Isaac Corporation, hence (FICO). This score is a three-digit number used by lenders to determine if they will lend you money. FICO scores are based on 5 factors:?

• Payment history (35%)
• Amounts owed (30%)
• Length of credit history (15%)
• New credit (10%)
• Credit mix (10%)

Lenders use both of these scores to assess your credit worthiness.

Other People's Money

If you’re going to expand your business, eventually you will need other people’s money - typically a bank. Your business credit isn’t even a factor. To be clear, I have business credit. I have 2 lines of credit, and 2 business credit cards, with minimal utilization. I haven’t missed a payment or paid late.? I have money in the bank. While all of that is great, it was my personal credit status that helped me obtain the loan for this property.? I’m sure if I was late on any business related payments, it would have factored in. Otherwise, the focus was solely on my personal credit.

If you intend to obtain a commercial loan, ask the potential lender what their credit score requirement is. If your credit needs some work, get to work. It's fixable. It will just take time.

See you next week for documentation and lending requirements.

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LuSundra Everett, EA is the Home Biz Tax Lady, owner of Everett Tax Solutions, and ETS Tax Relief. LuSundra is passionate about educating taxpayers about tax law in an easily digestible manner. LuSundra is a huge proponent of tax education and offers training to other Tax Professionals to help them stay on the cutting edge of tax law and new developments. If you need assistance with an IRS or state tax issue, contact ETS Tax Relief here.