Think your personal credit score won’t matter when applying for financing for your small business? Think again…
Financial institutions use the Five Cs of Credit to determine the “credit worthiness” of a business owner (meaning, the ability to borrow and then repay money). These five Cs are:
- Character
- Capacity
- Capital
- Collateral
- Conditions
The last four are all easily measured by the business plan as well as an assessment of the net worth, education and work history of the entrepreneur. Character is harder to quantify so financial institutions use a couple of measures – including the beacon score – to act as a proxy character assessment of an individual.
What’s a Beacon Score?
The beacon score is one of two measures on a credit report, and it’s a summary of how an individual has used credit in in the past. The report shows all the outstanding credit facilities (such as bank loans, credit cards, lines of credit and car loans) that you have, and how well that you’ve kept up with repaying those loans. It also shows the total available credit, and lists all the places where you have inquired about getting credit (such as at a car dealership, or by inquiring about a cell phone plan).
The beacon score measures previous performance with credit and tells a story about an individual’s past and current history with credit, so lenders use this as a predictor of future behavior. If someone has a history of missed or late loan payments, or has made what a lender considers “excessive” credit inquiries, then the beacon score will be low.
Read more from Small Business BC