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Have You Fallen Victim to the Small Business Credit Conundrum? The idea of complete separation between business and personal credit is, sadly, an illusion.

By Eyal Shinar Edited by Dan Bova

Opinions expressed by Entrepreneur contributors are their own.


For most small business owners, there is an unspoken rule to always separate church from state when it comes to using personal credit for business.

Related: The 4 Lines of Credit Now Available to Small Businesses

The obvious reason is that personal credit should be used only for non-business expenses while business credit should be used solely for the benefit of the business and "never the twain shall meet."

However, in the current lending environment for small-to-medium-sized businesses (SMBs), this goal of a clean credit demarcation is less clear than most people realize.

Credit confusion

Every day, tens of thousands of SMB owners apply for and, liberally use, their business credit for a wide variety of needs. Yet, as outlined in a 2017 survey conducted by the National Small Business Association, "46 percent of all small businesses use personal credit cards. Many small businesses fail to separate business and personal expenses . . . according to research conducted by MasterCard."

In addition, the Nav American Dream Gap Report, conducted in 2015, revealed that, of the small business owners surveyed, "45 percent did not know they had a business credit score, 72 percent did not know where to find information on their business credit score, and 82 percent didn't know how to interpret their score."

To some degree, the meaning of "credit" that we've grown accustomed to has perpetuated misconceptions relating to the process of accessing either type. Many SMB owners incorrectly assume that their business and personal credit are completely unrelated. Different cards, different accounts, different terms, right?

Related: 4 Steps to Establishing a Good Business Credit Score

Much to the chagrin of many, however, this is not the case.

As the usage lines continue to blur among credit types, many SMB applicants continue to be understandably confused by approval requirements specific to small business credit. Meanwhile, on the other end of the spectrum, commercial lenders are instituting stricter demands for credit approval. And these, unfortunately, translate into less access to business credit for many SMB owners.

So, no matter which way you look at it, the reality is that business credit is for the most part inextricably linked to your personal credit -- you must have one to unlock access to the other. Accordingly, the idea of complete separation turns out to be nothing more than a clever marketing illusion.

Personal credit infractions impact business.

To begin with, in our current SMB lending environment, most applicant approvals are directly tied to an applicant's personal credit score. In the event that his or her personal credit score is low, the alternative route to credit access is a personal guarantee by someone else.

Further, after an applicant receives credit approval, should this person pay late or default on payment terms, then his or her personal credit suffers a negative impact immediately.

Simply put, SMB owners seeking business credit are boxed into a system that is heavily dependent on personal credit. Unfortunately for many of these owners, personal credit infractions of the past can disrupt opportunities (dependent on credit access) in the present that could have helped grow the business.

Data-driven access

So ,what is a viable alternative funding solution that SMB applicants can pursue that doesn't require access to a personal credit score? One such solution, developed by Fundbox, combines artificial intelligence and something called the Small Business Graph, which provides SMB applicants a new, more convenient path to credit.

Think of the graph as an intricate network of transactional data that emanates from and around the SMB applicant's business. This transactional data can include processed invoices (issued or paid), purchases of goods and services, payments to preexisting lines of credit and more.

In volume, this data, accessed via bank accounts, ERP, CRM or accounting software, forms informational "signals" that an artificial intelligent (AI) risk model uses to quickly assess the credit-worthiness of the SMB business in question.

With the growing amount of SMB data that's constantly being generated naturally through the regular course of business, this solution offers an alternative to personal credit validation faster and more efficiently any human underwriter would be able to facilitate.

Image Credit: Fundbox

Purposely built for growth

As cloud computing continues to expand, and more small businesses are connected using internet-based applications, the resulting bounty of digitized data is feeding into the Small Business Graph and quickly democratizing access to credit for all SMBs.

This includes applicants who would prefer not to use their personal credit for a credit application process and those who have been denied access based upon their personal score.

In closing, there's no doubt that small businesses are the foundation to our economy. Therefore, it's to everybody's best interest that SMB owners have access to the right tools and services designed to help them thrive.

Related: 8 Ways to Get the Most From a Business Credit Card

With the right data backing up today's underwriting and funding process, small businesses can reach their potential, unhindered by the traditional small business conundrum of credit.

Eyal Shinar

CEO and Founder of Fundbox

Eyal Shinar is CEO and founder of Fundbox. Prior to his current role he served as a vice president at Battery Ventures where he led many projects and investments in the areas of finance, machine learning and software as a service. Additionally, Shinar was one of the first employees of Old Lane, a $5.5 billion New York-based global hedge fund (later acquired by Citigroup), and also worked for Castle Harlan, a leading $6 billion NYC-based buyout firm. Shinar earned his MBA from The Wharton School of Business at the University of Pennsylvania.

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