The Importance of Personal Credit History on your Business
The importance of your personal credit history on your business
Most business owners will need to take up business loans at some point in time to keep their businesses running and growing smoothly.
For many small business owners, tapping on personal credit facilities is a common option to start and fund initial business operations. However, this should only be a short term measure due to the higher costs involved. Hence, it is important for businesses to apply for their own business loans once they are ready. However, what business owners may not realize is that their business credit worthiness is strongly related to their personal credit history!
It is normal practice for Financial Institutions (FIs), such as banks and finance companies, to check the owners' individual credit report before granting a loan to any business. Why are FIs interested in the business owners' credit history? This is because your credit history is a reflection of your attitude towards debt repayment. Since you are the owner, it would be indicative of your company's attitude toward repaying its loans as well! This is especially true for new businesses (in operation for less then 3 years) looking for their first business loans. As these businesses lack established financial track records, FIs have to rely heavily on the owner's personal credit history and debt servicing ability when assessing the business loan application.
This is why maintaining good repayment history is essential for business owners. Before applying for your business loan, do analyse your individual credit report to understand your credit reputation, and ensure that your credit history is up to date. If you don't have a recent copy of your credit report, you can obtain one from Credit Bureau Singapore (www.creditbureau.com.sg).
There are three main warning signs that FIs look out for in a credit report
1) Late payments
2) Missed payments
3) Bankruptcy
These indicators can remain on your credit report for a long time. Although the occasional missed or late payment would probably be acceptable for most FIs, an established pattern of late or missed payments may raise some questions on your business loan application. For many FIs, such patterns may be taken as a sign that the business owner, and hence his business, are already struggling to service their current loans. FIs may be adverse toward extending additional loans to such businesses.
If your business is regularly being rejected outright for a business loan because of your personal credit history, there are three things you might consider doing.
Firstly, exercise personal initiative to write in and explain to the FI why the payment was late or missed. Reasons such as credit card disputes pending resolution, or having to pay for an expensive urgent treatment for a loved one, may be acceptable to some FIs.
Secondly, you should elaborate on how you and your business will ensure prompt future repayment. For ex-bankrupts, do explain the nature of the bankruptcy and why it would not happen again. However, you should note that most FIs would not consider lending to ex-bankrupts within the first three years of their discharge. Former debtors under the Debt Repayment Scheme (DRS) administered by the Insolvency and Public Trustee's Office (IPTO) should similarly explain the circumstances which caused them to fall into debt, and highlight the steps they have taken to avoid a recurrence.
Thirdly, suggest that your FI take FICO SME Blended Score Report into consideration. This report produces a credit score by combining your personal credit data with your business's commercial data such as elements key financials figures, non banking commercial trade lines from trade suppliers, demographic information, etc. This may lead to a more positive outcome for your loan assessment if your business has been financially stable with a good payment record. Credit Bureau Singapore can only provide this report to the FIs upon their request.
As a business owner, your trade line could be your life line. The ability to access financing is important to stabilize and grow any business. As such, do check your individual credit report regularly to understand your credit reputation, and ensure the accuracy of your data.
ARTICLE CONTRIBUTED BY CREDIT BUREAU