In this podcast, SCORE mentors talk with Ty Kiisel of OnDeck about personal vs. business credit and how to obtain business loans.
What is the greatest misconception that most small business owners have regarding business credit?
You know, I think you'd be surprised that the greatest misconception that small business owners have about business credit is that it actually exists. That their business has a business credit profile.
How would that be different from their personal credit?
Well, you know, there's lots of differences. Your personal credit score is reflected in a fairly universal single score. For example, if you've got a 700 personal credit score, that pretty much means the same thing regardless of the credit bureau you'd go to. Your business credit profile is actually a collection of scores and information about your business and it's really pretty different. If you take the three biggest business credit bureaus, Experian, Equifax, and Dun & Bradstreet, they all look at your business a little bit differently, with a little bit different focus. You need to know a little bit more than just a simple score to understand your business credit profile.
Experian and Equifax also have business credit bureaus. TransUnion is tied into the bank's credit system so they get a lot of information about your business credit cards and any business loans that you have. Dun & Bradstreet probably focuses more on the credit relationships that you have with your vendors, and Experian is kind of a ... You know, they all report on the same type of thing.
Experian is probably the hybrid of the two but all of them are going to report on your business credit usage, the relationships you have with your vendors and those kinds of things, but all three of them weight that data differently so you're going to get a different score, depending upon ... or a different profile, depending upon the bureau that you go to.
A good business is going to be reflected well, regardless of the credit bureau. Those are just the big three. There are other business credit bureaus as well, but those are the three big ones.
Which one does OnDeck use?
OnDesk uses several. Experian is one that OnDeck uses, as is PayNet. PayNet isn't one of the big three but PayNet is a bureau that we use. They all have data that OnDeck uses when they evaluate your business credit worthiness.
What's included in your personal credit score? I'm assuming checking credit for a loan, obviously. OnDeck makes loans. What number won't you look at them?
First off, let's talk a little bit. You've got two questions there: what makes up your personal credit score? The three big credit bureaus, Experian, Equifax, and TransUnion, these are the personal credit bureaus. They pretty much ... You look at data the same way. The payment history is about 30 percent of your score. The amount of credit owed is 30 percent of your score. The length of your credit history is about 15 percent of your score, and the type of credit you use is about 10 percent.
For example, if you have a mortgage, an auto loan, some kind of a revolving credit, they are all not the same type of loan. The mix you have that you demonstrate you can service well, that makes a difference. New credit inquiries are roughly 10 percent of your score. Those are the things that the credit bureaus look at.
Sorry, I think you are 5 percent short. What happened to that last 5 percent?
I might have said 30 percent. Payment history is 35 percent of your score, so that should all add up to 100 now.
As a lender, as a small business lender looking at a small business owner, a traditional bank, for example, they want to see a credit score of 700-ish. However, in some instances, they may drop to 680. If your credit score is below 680, you probably won't find success at a bank. The SBA, for example, has a different threshold. If you've got a credit score of 650 or better, you'd have success at the SBA. A credit score below 650, you probably would not find success with the SBA.
Online lenders like OnDeck will work with a borrower who has a little bit lower credit score than that, provided they have a healthy business and can demonstrate that their business is healthy and able to repay the loan. Some lenders will even go as low as a credit score of 500, depending upon the circumstances.
Now, realize that, if you're a borrower and you have a 600 credit score, you will likely pay more in interest than you would if you had a 700 score because you can't go to the bank and get a lower-interest loan from the SBA or from the bank, so, depending upon your credit worthiness, the interest you pay is likely going to be greater.
That's not the only factor that determines how much you're going to pay. In the previous podcast, we talked about funding and having a greater access. That's also going to be a consideration. Even if you have a 720 credit score personally, if you need money tomorrow, the ability to access that capital quickly is going to come at a premium as well.
For more, click play on the video above to listen to the full podcast, and download the transcript.