Often the small business owner is tied directly to the company through the credit report. This works well creating a global cash flow picture as well as payment history. The issue is activity and the antiquated scoring of the system.
First, when the small business owner sets out the only way of determining if the risk is good for the bank is a personal credit report. Determining if bills are paid on time, how much credit is outstanding vs. available, and if there are any derogatory items such as liens or judgments will help make a decision for the bank. Honestly, a credit score was not even something we were told to look at unless it started with a 5! It was about the detail…that has changed.
Second, the credit report is used to determine existing payments and balances to determine if the new loan can be repaid with sufficient margin. If current debt obligations are greater than income then a significant mitigating factor must be present. Such as, does the loan request pay off all debt and reduce monthly payments? If not be prepared for a turn down.
Now we know how the credit report is used by a banker for a commercial loan. What are the issues? Everyone looks at it now. Buy a house, car, boat, insurance, increase business line of credit etc. every financial transaction often has a credit inquiry attached. This will reduce your score. The solution? Be cautious on who and how often the report is pulled. Second, obtain a D& B number. Go online to www.dnb.com and sign up for your free number. Begin offering that to clients and as the number grows you can reduce the number of inquiries on your personal credit. This will not eliminate the issue but alleviate it a little. Every point counts!
Hope that helps explain how a credit report is used by the bank and offer an option to help improve your score.