What Is a Business Credit Score and How Does It Work?

Your business credit score is much like your personal credit score. It’s a rating of how likely your business is to pay its debts and its bills on time.

Good business credit is vital in getting business insurance, small business loans, and supplier payment agreements. A high score may lead to lower loan interest rates and more favorable supplier payment terms. A low score can make borrowing more difficult or even impossible.

Understanding your score is a significant step toward building your company. Here’s how business credit scores work.

What Is A Business Credit Score?

A business credit score is the measurement of a company’s creditworthiness that consists of several factors to understand a company’s financial position and level of risk.

There are multiple business credit score providers. These are some of the most common.

• The Dun & Bradstreet PAYDEX Score.
• The Experian Intelliscore Plus.
• Equifax offers a payment index score, a credit risk score, and a failure risk score.
• FICO’s Small Business Scoring Service (SBSS) score.

Why Your Company Needs a Good Business Credit Score

Business credit is just as important as personal credit. Here are some things that a good business credit score can do for you.

• Save You Money. Lenders offer better interest rates to businesses that have good credit.
• Get Business Loans Without a Personal Guarantee. This reduces your personal liability and protects your personal credit score.
• Maintain a Competitive Edge. You can transfer your interest savings to your clients through lower prices or keep a higher profit margin.
• Lower Stress and Greater Confidence. You’ll know you can get money when you need it.
• Obtain Trade Credit. A good business credit rating can help you get better repayment terms with your suppliers. This is important when you need to buy equipment and inventory.

Good business credit is essential to starting and running a business and should not be treated as an afterthought. Make it part of your business plan from the beginning.

How To Establish Business Credit

Every business has to establish credit for the first time. Here are the steps:

• Set Up Your Business Legally. The first step towards business credit is choosing the right structure. Set up your business as a sole proprietorship, partnership, or limited liability company.
• Obtain Your EIN. Your Employer Identification Number (EIN) is like a social security number for your company. It’s a company ID number that you will use to file taxes, open bank accounts, and apply for a business license.
• Set Up a Business Bank Account. Open a business bank account for your company. This is required to clearly distinguish between your professional and personal expenses. It also provides key data lenders use when reviewing financing.
• Open accounts. Using supplier credit, loans, or a business credit card will help your business establish a credit record.

As with personal credit, managing your accounts well is a key part of achieving and maintaining good business credit. Pay all bills on time and keep your business credit card balances below 30% of your credit limit.

Keep Track of Your Business Credit Reports

Checking business credit is not as simple as checking personal credit. Business credit reports are not covered by the Fair Credit Reporting Act, so you are not entitled to a free annual credit report from each provider.

There are still ways to check your business credit. Reporting agencies will provide you with a copy – though you may pay a fee – and some companies can give you free access to your business credit report and score.

You have the right to dispute erroneous entries on your business credit report. Contact the agency to make the appropriate corrections if you discover outdated or inaccurate data.

Is Business Credit Tied to Personal Credit?

While you and your business have distinct credit ratings, it can be important to maintain good personal credit if you are seeking business financing. Your personal credit history may be examined when applying for a commercial loan.

You must segregate your personal and business credit as much as possible. However, while you do your best, your personal credit can still affect your business. The impact amount depends on the specific situation.

Your lender may ask you for your social security number in addition to your EIN, especially if your business is relatively new and has not yet established an extensive credit record.

This usually means that your personal credit is under review. If you use personal property or personally guarantee a loan and have little accumulated business credit, your personal credit history will likely come into play to cover gaps.

What Factors Influence Your Business Credit Score?

As far as credit reporting agencies are concerned, there is no standard score model for assessing risk. Lenders, vendors, banks, leasing companies, businesses, and finance companies use different reports and rating models based on the credit score agency they subscribe to. 

The business credit reporting agencies compile a score based on the various reports it receives regarding your business. Some agencies consider information from the homeowner’s personal credit report and commercial organizations, such as the Small Business Financial Exchange.

1. Creditworthiness

Many of the factors that go into a business credit score are similar to those that go into a personal credit score. Payment history is one of the most important. Timely payments on debts and bills will help you build good business credit.

Business credit scores also consider the age of your business: you may get a higher score if your business has been around for a while. The percentage of the available revolving credit you are using, known as credit utilization, also determines your business credit score., Other factors include the type of industry you are in and the size of your business.

Reports from vendors, suppliers, or creditors regarding a business’s accounts and activities help determine a business’s credit rating. The business credit reporting agencies compile a score based on the various reports it receives regarding your business. Some agencies consider information from the homeowner’s personal credit report and commercial deposits, such as the Small Business Financial Exchange.

2. Credit Capacity

Creditors want to see positive cash flows, a sound banking history, a steady payment history, and cash reserves.

These may be difficult to achieve for small businesses or relatively new businesses. As with personal credit scores, you’ll need to start small and have a strategy for building better business credit.

3. Capital Invested

One of the factors that bankers use when assessing a commercial loan is how much money the owner has invested in the business.

Banks look at the company’s debt-to-equity ratio to understand the amount of money you’re asking for versus the amount of money you’ve already invested in your company. The smaller the ratio, the better.

What Business Entities Can Have Business Credit?

Every business can apply for credit. It doesn’t matter if your business is an LLC, proprietorship, or partnership. All you need to do to establish a credit score. You do not need to be a registered business or a full-time business owner to qualify; even small part-time businesses can generate sufficient revenue for a new account.

Start Early

If you’re starting a business, think about business credit from the start, and have the plan to build it. Even if you don’t need credit right away, setting up a solid structure and taking on well-chosen credit lines can set you up for the future.

It is likely to come a time when you want to expand, you want to set up payment terms with suppliers, or you need to cover a cash flow issue. When that time comes, your business credit score can be a major asset!