I recently spoke with Levi King, the CEO and co-founder of Nav (a free site offering business owners access to their personal credit scores and business credit profiles). When I asked him what the biggest misconception business owners have about business credit, he didn’t miss a beat. He said, “They don’t realize they have a business credit profile.”

Business Credit Misconceptions

He also offered some great insight into how business credit works along with some advice that could benefit any small business owner—regardless of the current state of their credit profile.

Ty Kiisel:      

Levi, we talk a lot about what business owners can do to strengthen their business credit profile. In your opinion, where’s the most important place to start?

Levi King:        

That’s easy, be aware. Dive into your business credit profile and make sure you’re paying attention to what’s happening. You’d be surprised at what a difference monitoring your credit profile makes.

Ty:  

That sounds like an overly simple answer to a more complex question.

Levi:  

It might feel that way, but it really isn’t. 45 percent of the businesses we identify in our American Dream Gap Report didn’t know they had a business credit score and 82 percent don’t know how to interpret what the credit bureaus are reporting about their businesses.

It was also interesting to learn that the businesses who regularly monitor their credit were 41 percent more likely to be approved when applying for a small business loan.

Ty:   

A 41 percent improvement seems like a pretty substantial boost. Why do you think credit-monitoring makes such a difference?

Levi:   

I think it’s human nature to make a difference in the places where you’re really paying attention. Basically, attention drives behavior.

Ty:    

Does this apply only to the business profile or does it work the same for personal credit?

Levi:    

It will also help your personal credit score. And this is important. Many lenders still reference, and heavily weight, a business owner’s personal score when evaluating their business creditworthiness. The good news is that half of those borrowers with a sub-prime personal score and 80 percent of those with a mid-prime score saw improvement in six to 12 months—and it started by regularly monitoring their credit profiles. Even better news is that the same focus on your business credit profile will often see results even faster than that.

Ty: 

There are likely some business owners who would say, “I don’t have six months to a year, and I need to see results sooner.”

Levi: 

I’m sure there are, but it takes time. Building a strong business profile is a matter of making sure there is more good stuff than negative stuff in your profile and it won’t happen overnight. If you have a weak business profile, start by resolving the negative things and give it time.

Getting positive credit behavior on your report will make a big difference. Think in terms of 15 positive accounts for every five negative accounts. Negatives will stay on your report for a period of time, but adding positive credit accounts will move you up because of the ratio of good to bad.

Ty:             

Unfortunately, your personal score and your business profile can drop rather quickly, right?

Levi: 

That’s definitely true regarding personal credit score, in fact a borrower with an 800 score can see a 100 point drop with a single bad report. Fortunately, your business profile is a little more forgiving and won’t drop as fast as your personal score so long as the positives on your report outweigh the negatives. But you can’t afford to ignore your business profile—doing so won’t improve your profile and will ultimately hurt it.

Ty: 

In other words, it takes longer to improve a profile than it does to weaken it?

Levi:  

Right, you can’t game the system. There are some things that will make big improvements (like paying off a tax lien), but it’s consistently good credit behavior over time that will have the greatest impact.

Ty:    

What are some of the other reasons it makes sense for a business owner to better understand their credit situation?

Levi:

For 31 percent of those in our report, it was a trigger for growth. At least those business owners with a better understanding of their credit profile were 31 percent more likely to consider expanding their businesses.

What’s more, 26 percent of the businesses in our report avoid hiring because they’re frustrated with how difficult it is to borrow capital. In other words, the challenges of borrowing can contribute to slamming on the brakes so far as creating jobs is concerned. So a better understanding and taking action to improve your profile is a way to encourage business growth.

Ty:  

Is there anything else a business owner should know about their business credit profile?

Levi:

A business profile is more prone to errors and more fragmented. Although the bureaus are all reporting on your business credit history, they don’t all evaluate your business’ information the same way. There’s a lot of data involved from a lot of different sources—which introduces opportunities for error. Watching for errors so they can be corrected is another reason why it’s so important to regularly monitor your credit.

Ty: 

How often do you think they should be looking at their profiles?

Levi: 

At least monthly. Remember, awareness drives behavior—it’s human nature. I think that’s why business owners who regularly monitor their credit are 41 percent more likely to see improvement and have success when looking for a small business loan.

 

 

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