Most creditors still rely on the PAYDEX for business underwriting, but the FICO® SBSS℠ score WILL be used for term loans, lines of credit, and commercial loans up to $350,000 from the Small Business Administration (SBA). The minimum score to pass the SBA’s pre-screen process is currently 140 out of 300.
FICO Small Business Credit Score
Until recently, the most important business credit score was clearly the PAYDEX, which is a score developed by Dun & Bradstreet (D&B). The PAYDEX score is literally just a dollar-weighted record of payments as reported to D&B. This score is used by lenders and creditors all over the world to determine a business’s creditworthiness and lendability. The other score that is commonly used is the Intelliscore by Experian.
Both of these scores range from 0 to 100. Any score of 80 or higher is typically considered good. Having a good business credit score is the key to getting approved for financing and trade credit, as well as qualifying for lower rates on things like business insurance and certain loan options. The data used to generate your PAYDEX or Intelliscore is based on your business strengths and has next-to-nothing to do with your personal creditworthiness.
But there’s a new kid on the block, and he’s trying to change all that…
Does the name Fair Isaac mean anything to you? How about, Fair Isaac Corporation?
Well then what about FICO®?
Yes that’s correct, FICO®, North America’s leading personal credit reporting agency is now producing a BUSINESS FICO® score. They are calling it FICO’s Small Business Scoring Service (SBSS℠).
The SBSS℠ rates small businesses by their likelihood of making payments on time. The score ranges from 0 to 300, unlike the other two business scores which as stated above, range from 0 to 100. As you would expect, the higher the score, the better, but there is one major difference: The scoring is based on personal AND business credit data.
Since the odds are that FICO® already has your personal credit information in their database they have created a combo-scoring system for small business owners. So while a strong history of business credit with timely payments to vendors and suppliers may help boost your SBSS℠ score, having negative items on your personal credit will lower it, and vice versa.
The major development that you need to know about is that the U.S. Small Business Administration (SBA) now uses the score to pre-screen its most popular 7(a) loans. If your score falls below their minimum threshold, you will likely not qualify. In fact, starting at the beginning of 2014, all SBA 7(a) loan applications up to $350,000 were required to go through a business credit score pre-screen, and just to be clear, if you’re applying for an SBA loan, most likely it’s a 7(a).
It has always been difficult to get approved by the SBA, but this has added a new dimension to the process.
Now, in 2019, all business owners should be aware of the FICO® SBSS℠ credit score, but many have never heard of it because𑁋until now𑁋it’s been hard to access. Banks aren’t required to disclose that they use the FICO® SBSS℠ score, and very little information exists about it online. More lenders are starting to use it because it helps them make faster, more-accurate lending decisions by giving them more of the big picture when it comes to working with small business owners.
Here’s how the SBSS works:
- It can be used for term loans and lines of credit for amounts up to $1 million, and if you’re applying for $1 million or less in cash credit, chances are your lender will use the SBSS℠, at least in part, to help make its decision.
- As mentioned already, the score ranges from 0-300, with 300 being considered perfect. The minimum score to pass the SBA’s pre-screen process is currently 140. Most other lenders that rely on this score set their minimum at 160.
- The score is calculated by looking at personal and business credit history, as well as other business financial information, like: age of the business, the number of employees, and financial data, such as revenue and assets. The degree that this information affects the score is not entirely clear.
- What IS clear is that if you have negative, or no credit history, it can take months or even years of positive credit activity to move your SBSS℠ score significantly higher. It’s vital to build your credit and ensure it’s healthy before you need it.
- Because businesses are not covered by the Fair Credit Reporting Act (FCRA) protection, you can be denied business financing due to your SBSS℠ score, and lenders are not required to notify you of the reason why.
- If you are a new business and have no business credit history, the highest possible FICO SBSS℠ score you can get is 140. But to do so, would require perfect personal credit.
It appears that this score has the potential to give a serious advantage to entrepreneurs who have maintained good personal credit while punishing those whose personal credit has suffered. The power of building a strong business credit profile has always been the ability to rely on your business strengths for cash flow and funding, regardless of any negative information that may be reporting on the personal side. Not so with the SBSS℠.
But even if your personal credit is good, there is still some reason to be concerned. It is currently unclear how using the SBSS℠ score will affect you as the guarantor of a business loan or line of credit, or what type of asset protection strategies are needed to maintain proper liability separation. For instance, if you sell your business, at what point will the SBSS℠ update to reflect the new business owners personal credit information?
If it is your desire to maintain complete separation between your business and personal credit data, then a careful strategy is required.
Opening tradelines that report to D&B, Corporate Experian, and Corporate Equifax and supplying ONLY business information to these vendors will allow you to develop positive payments experiences on your business reports that do not reflect on your personal credit report. Information that does not reflect on your personal credit (either good or bad) will not affect your business SBSS℠ score.
You may be reading this and possibly be one of those entrepreneurs who has already offered a personal guarantee for a business loan or even taken personal loans to pay for business expenses. Perhaps you’ve used personal assets as collateral for a business line of credit or cash-advance… all of these things will have the effect of commingling your business and personal credit.
It may be necessary to dispute information on your business credit profile or even scrap your business and start building credit again with a new tax ID. These are extreme steps, however, and if you are really after an SBA loan it’s likely that you will have to provide personal credit information of one type or another in any case.
If you have questions about this or anything else related to credit, cash flow, or business funding, please make an appointment with our advisor team. We work with hundreds of small businesses each year to overcome cash flow struggles so you can grow the business you want and deserve to have.SCHEDULE APPOINTMENT