Mon 29 Jun 2009
Besides your reputation, the one thing in life that deserves fierce protection is your credit score. The same holds true when it comes to the name and reputation of your small business and its credit score. Traditionally, small business debt is not a part of your individual credit score. However, changes in the economy, business and banking practices are beginning to influence this longstanding tradition. Small business owners are finding that financial institutions are sometimes reporting bad business debts to the credit bureau. Unfortunately, the creditors aren't doing so under the name of the business, but the business owner.
Small businesses typically have to rely on some type of loan or line of credit to cover the cost of overhead at some point in time. Such credit was not previously considered as part of an individual's credit history, unless, of course, delinquency became a problem. Unfortunately, delinquency is a growing problem, especially given the current economic circumstances. It is likely that delinquency is to blame for the practice of reporting business activities on a personal credit report.
The Ups and Downs
How will a credit score be impacted if a bank reports on small business debt? The credit scoring process is complex and certain standards also fluctuate right along with the economy. It is difficult to pin an exact number on the impact of small business debts on an individual's credit score, but a safe estimate is likely 25-75 points. For struggling small business owners, this fluctuation in credit score could make the task of personal finance management even more daunting.
Despite the changes in business and credit reporting practices, the likelihood of business credit impacting one's personal credit score is small. Most financial institutions do not make it a habit, and the average small business owner's personal credit is safe. The best way to protect a personal line of credit is by monitoring your personal credit report on a regular basis, minimally 1-2 times per year. In addition, if maintaining the integrity of your business credit becomes a problem, consult with a financial professional to stop a small spark from becoming a wildfire.