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By next summer, small businesses should have credit scores similar to those already assigned to most consumers. Lenders will use the scores to size up the credit-worthiness of small businesses that apply for loans. That's good news for those whose credit histories can be easily summarized in a single number, but it won't make the loan process any easier for businesses whose credit histories are more complicated than plain vanilla. In April, the SBA announced it had hired two giant credit information companies--D&B and Fair Isaac--to build credit models based on the SBA's enormous portfolio of guaranteed loans. The scores will operate the same way as consumer scores: the lower the score, the higher the interest rate.
The resulting model, which is supposed to be completed this fall, will be used to create generic credit scoring templates that can be used to sort loan applicants into three piles: automatic "yes," automatic "no" and "maybe--get more information." Jonathan A. Scott, an associate professor of finance at the Fox School of Business at Temple University in Philadelphia, says borrowers whose credit histories need explaining will still have to cultivate the goodwill of their lenders and draw on those relationships to seal the deal.
It's up to business owners to monitor the status of their scores, especially making sure a recently cleaned-up credit history is reflected in improved scores. Business owners will also have to explicitly ask about the use of the score in lending decisions. "If an applicant asks why they were turned down, we'd explain the factors, not just show them the score," says Judy Delbovo, senior manager for business lending for Harris Bank in Chicago, which already uses its own small-business scoring system.
Meanwhile, all the big credit reporting agencies are getting much better about tying small-business owners' personal credit histories to their businesses' payment habits. "Depending on the size of their firm, there's a clear and compelling case that how they pay their own bills is reflective of how they pay their business bills," says J. Dann Adams, senior vice president of North American sales at Equifax, one of the country's biggest credit reporting agencies.
The upshot: Your personal and business credit histories are going to blur together. It won't be long before your personal financial habits will directly impact your company's credit status.