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Of the three major business reporting bureaus, only one conducts financial reports on a yearly basis. They are called, of course, “Glaciers,” and they report annually. While this may seem like good practice, it can actually be a hindrance to an individual's ability to manage his or her personal finances. Most people don't even realize that the “business credit score” is different than their own personal score. That is because the two reports contain different information.

The two reports, based on totally different criteria, have wildly different outlooks on an individual's business credit score. The business credit score reflects an individual's responsibility to borrow. The “business loans” section of the score reports on the total amount of outstanding business loans versus total dollar amount of business loans outstanding. This means that if you owe fifty thousand dollars in business loans versus ten thousand dollars in outstanding loans, your score will be much lower. This reflects well on your personal finances, but will not reflect very well on your ability to pay back the fifty thousand dollars in business loans.

Your personal financial responsibility for debt repayment is actually determined by your credit risk. A credit risk is any individual who is likely to default on a loan (and it happens more often that individuals with excellent credit ratings default). There are two elements of a credit risk (the type of risk and the potentiality of a default): personal and trade group. A trade group consists of people who do business with you (and hence your trade group are your existing customers, suppliers, and employees). Each individual in your trade group has a credit risk distinct from others, but because all of them are part of your existing customer base, there is a common credit risk, which applies to all of them. This credit risk makes all of your existing customers look bad in your eyes.

Therefore, if you are looking into how you can improve your credit rating, first consider what is already known about you and your credit history. It is this information which is used by companies such as Experian, Equifax, and TransUnion to determine your credit rating. For instance, a negative account inquiry would show up on your credit history as an inquiry. A positive inquiry would indicate that you are a responsible borrower. Of course, all good companies should always have a copy of their clients' credit reports to make sure there aren't any mistakes or omissions.

To increase your personal credit rating, you need to take steps to improve your personal history and those of your immediate family. Paying down debts, establishing and maintaining good savings and checking accounts, and avoiding any large-scale credit checks on your credit history are all important. If you have no history of bankruptcies or foreclosures, you also need to start building a solid credit history built up over several years. As you do so, your business credit scores will gradually improve.

But there is a much more important reason for checking your business credit reports. The three main credit bureaus – Experian, Equifax, and TransUnion – use your credit history to predict your likelihood of future credit problems and issues. This way they can provide organizations with an estimate of your potential liability. If you have bad business credit reports, such assessments can be used to lower your insurance premiums and employee compensation costs. The reasoning is simple: if your financial history indicates you are more likely to default on loans . . . . . . or other obligations, the insurer will have greater risk when offering you coverage, thereby increasing the cost of the premiums.

A lender's ability to obtain repayment is also improved by knowing more about the people borrowing from you. The most common forms of unsecured loans are personal loans, business loans, and merchant cash advances. Knowing the credit profiles of the people with whom you do most of your business transactions allows the lender to assess your capacity as a borrower. While knowing a person's personal credit history does not allow you to anticipate every possible default, it does help to better determine whether your application for a new loan will be approved.

There are a number of ways that small business owners can dig into their personal credit reports and find out exactly what information the lenders are looking at. One popular option is to go online and search for a service called Credit Karma. Using the site's card-rating feature, small business owners can see what lenders are looking for in a potential borrower. They can discover the areas where they are rated lowest and areas where they are graded above average. This way they can improve their chances of getting approved on loans for which they are most qualified.

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