Business owners should be knowledgeable about credit scores to ensure success. Being aware of the impacts of a credit score and being proactive in improving one can be advantageous to a business.
An Overview of Business Credit Scores
Understanding business credit scores is key for any business. Knowing how this rating system works and how it is calculated is incredibly beneficial for any company. It is important to understand that business credit scores are not the same as personal credit scores. Business credit scores are based on different criteria and are used to determine the creditworthiness of a business. These scores can be used by lenders to determine whether or not to extend credit to a particular business. As such, it is important for businesses to understand and monitor their credit scores in order to ensure that they are able to access the credit they need.
If you’re a small business owner, you have probably thought of ways to get financing to expand your business. Although it is possible to start a business with personal funds from your savings, it is very likely that you will need to obtain more resources. Knowing how business credit scores work will enable you to unlock limitless opportunities for your business. You will be able to learn about how small business funding works, how to calculate credit scores, the difference between personal and business credit scores, and why you need a good credit score to grow your business.
This comprehensive guide is intended to answer all these frequent questions about credit scores and how they are necessary for all businesses, even if you are not currently seeking credit. Finally, you will be able to understand how conventional small business financing firms use your credit score data.
Business Credit Scores
Before diving straight into the particulars of business credit scores, their applications, and how to monitor them, it is essential for you to know why they are so significant, and why this is a complex topic for many. Numerous entrepreneurs like you, even those with high educational backgrounds, find business credit to be a difficult topic. There are many explanations that make it both complex and highly beneficial.
The Benefits of Having Good Credit Scores
- Before offering terms, suppliers will often review your business’s credit score. Having a high score will enable you to negotiate the best deals.
- Financial institutions like banks place significant emphasis on business credit scores and FICO ratings when authorizing lines of credit.
- In case you don’t have a business credit score, you must have a strong history of personal credit in order to secure a business loan.
The Challenges of Managing Credit Scores
- It can usually take a minimum of one to two years to construct or enhance your company’s credit history or individual credit score.
- It is possible to positively affect your credit scores by applying consistent effort, yet it is not within your power to alter them, since they are determined by external rating authorities.
- Keeping track of internal documents and monitoring the credit scores of small businesses can be a tedious process.
What is a Business Credit Score?
A business credit score is a numerical value that indicates the likelihood of securing financial assistance for a business.
A personal credit score, or personal FICO score, is comparable but not identical to a business credit score. Most people are aware of the concept of personal credit scores. However, there are some differences between the two. Personal credit scores range from 300 to 850, and most loan providers need a minimum score of 600 in order to give out a personal loan.
The range of business credit scores is from zero to 100, and for many small business loan providers, the minimum needed is 75. The Small Business Administration Banks (SBA), suppliers, and other lenders will look at the business credit score and FICO score closely when providing credit or payment plan options.
What Are the Differences Between a Business Credit Score and Personal Credit Score?
Business credit scores differ from personal credit scores in the following ways:
- Rating Agencies: TransUnion, Equifax, and Experian are used by consumer lenders, while business financing companies look to Dun & Bradstreet, Experian, Equifax, and even their own custom formulas.
- Scoring Range: For personal credit, the scores are from 300 to 850, and business credit scores run between 0 and 100.
- Standardization: Most credit bureaus use either FICO or VantageScore to evaluate consumers. Commercial lenders, in contrast, usually create their own criteria or turn to rating organizations such as Dun & Bradstreet to make lending decisions. Every small business financing lender has a distinctive formula.
- Accessibility: Multiple sources enable you to view your personal credit score without any cost, but the number of sources that allow you to see your business credit score is limited. To get your score, you must pay the three major business credit bureaus (Dun & Bradstreet, Experian, and Equifax).
- Data: While most lenders in the small business sector view only the business credit score or FICO score, some will take both into account.
A great tip for you as a small business owner is to try to keep your personal and business credit cards and borrowing approaches separate. This is because a bad business credit score can have an impact on your personal credit score, while a poor personal credit score can prevent you from getting small business financing. However, it can be quite hard to keep personal and business finances apart, as many business financing alternatives still call for an individual’s FICO score.
Applying Business Credit Scores
Business credit scores are a helpful tool for companies to assess their financial standing and to be able to make informed decisions. They can be used to determine a company’s creditworthiness and to get a better understanding of the potential risks involved in a financial transaction. By using business credit scores, a company can better manage their financial obligations in order to ensure that they are able to make timely payments and to maintain a good credit rating.
To protect personal assets, it is advisable for start-up companies to create a “business credit profile” that distinguishes their business credit from their personal credit as early as possible. Initially, personal credit is usually what is used to finance the start-up, while personal assets are used for collateral.
Ensure that only business-related expenditures are charged to business credit cards and that you don’t combine personal and business credit cards. Keep financial records, tax documents, and insurance separate. It may also be a good idea to have two different banks.
If you are just starting your company, chances are you have been using your personal funds to provide capital and have labeled it as “loans from officers.” After you have been running the business for a while, it is beneficial to set up a line of credit specifically for the business. This can help protect you from legal issues and make it easier to obtain a loan for your business.
Factors That Can Impact a Company’s Credit Score
- Longevity: How much time has your company been operating? Your score can be improved if you have been running the business for a few months or years.
- Income: How much money does your business make every year? If your company has a healthy income, that could affect your rating positively.
- Possessions: What resources does the business own? If you can show that you have some assets, such as real estate, this can boost your credit score.
- Managing Debt: Are you currently carrying any loans or credit cards? If you are using credit sensibly and paying it off within the designated time period, this will boost your credit score and better your chances of being approved for a loan in the future.
- Previous Experience with Personal and Business Loans: How long have you been taking out personal and business loans? What kind of loans have you taken in the past, how big were they, and how fast did you pay them back? Having a record of past loans which demonstrates your ability to pay them off can be beneficial for your score, and make you more attractive to potential lenders.
- Legal Filings: UCC filings and other public reports, such as liens and court judgments, are associated with an individual.
- Industry-Related Risks: Certain industries, such as bars and eateries, have a tendency to be more risky than others, and lenders analyze them differently based on prior experience.
If you are the proprietor of a business, you can obtain a copy of your D&B report for a fee by calling 1.800.333.0505. Generally, rating agencies take into account indications that you are attempting to enhance your business credit by making payments in a timely manner, getting and retaining credit cards for your business, and making timely payments on them. They also take into account the steadiness of your company and whether or not you are constantly increasing revenue and profits. All of these elements affect your score.
How Can You Use a Business Credit Score?
When considering whether to give financing to small businesses, loan providers will consult business credit scores from various credit rating bureaus. This score also helps lenders decide the size of the loan they are willing to give. Factors such as whether the business has paid previous debts, how quickly payments are made to suppliers, and how much money the business has earned over time are all examined.
The creditworthiness of a business can be evaluated anew through business credit scores. When a score is high, it implies a business has a record of making payments promptly. When the opposite is true, a low score serves as an alert. Loan providers need to be certain of the likelihood of a business repaying the loan on time. To help them make their decision, the rating agencies offer historical data for their reference.
Like it or not, small business loan providers usually rely on business credit scores to determine whether an individual should receive the loan they are requesting. Generally, lenders take into consideration both personal and business credit scores.
When opening a new business, it’s important to remember that your credit history from previous companies will follow you. It’s a smart idea to keep accurate records, regardless of whether or not you close one business and open another.
What Qualifies as a Positive Business Credit Score?
This is quite possibly the most important question raised in this article. Unfortunately, it is also one of the most complicated to respond to directly, since every lender applies their own method for determining when to offer credit.
Most small business lenders prefer a business credit score over 75, however, there are local lenders who may consider accepting scores lower than this for small businesses or startups. Consumer financing companies that stick to conventional methods are unlikely to provide loans to individuals with credit scores below 500. Nevertheless, if someone is ready to take on a higher interest rate and stricter payment conditions, other options are available.
This information from Nav.com provides useful insight into how small business lenders make their lending determinations. As displayed, a business credit score that is “in the red zone” is in a difficult situation. It is undesirable for a business to be within this credit reporting area.
What Is Business Credit Reporting?
Who Are Credit Reporting Agencies and What Is Their Role in Tracking Business Credit Scores?
Many small loan lenders use Dun & Bradstreet’s PAYDEX® scores as one of their criteria for making credit decisions. This score is based on the speed with which your business settles its debts, and it considers more details than just payment records.
You can sample the Business Information Report from Dun & Bradstreet displaying PAYDEX®, D&B Rating, Composite Credit Appraisal, and D&B Viability Rating. Dun & Bradstreet accumulate an immense amount of data on any small company that holds a “D-U-N-S® Number.” This information is sourced from public records, as well as direct conversations with the business and other businesses who work with the company being evaluated.
A detailed report from Dun & Bradstreet includes the following information:
- Information about yourself, including the location of your business, your contact number, and the D-U-N-S® number.
- A brief overview of when the business started, the total number of employees, the current capital, yearly income, and total worth.
- The general D&B Ranking and the D&B PAYDEX® score
- The Viability Ratings are based on calculations made by D&B which involve taking into account possible risk factors, comparing the company to other ones in the same sector, and additional considerations.
- The background of your company, including details on the current and past stakeholders, in addition to personal data on you and other important members of the executive team.
- Business registrations, such as the incorporation of a company.
- Summary of federal government action that displays data that is open to the public.
- Records about business activities, including industry-specific details, the employee count, and the physical address of the facilities and their locations.
- The Standard Industry Classification and the North American Industry Classification have their own codes.
- A visualization of corporate affiliations between parent companies and their branches can be depicted by a tree diagram.
- Examining Financial Reports and Crucial Business Proportions such as the Yield on Revenue, Fast Ratio, and Present Ratio.
- Any public documents such as liens, court judgments, and UCC filings can be found through public records.
- Information on finances is presented in great detail.
When it comes to lending decisions, lenders may rely on composite scores from Equifax and Experian to make their judgments.
Experian’s Intelliscore PlusSM is an assessment tool that is not as comprehensive as D&B PAYDEX®, but it still compiles both commercial and individual data to forecast whether a company will fail to meet its payments in the upcoming 12 months. Businesses should strive to avoid the “red zone” if they are expecting to obtain small business financing.
The Small Business Scoring Service (SBSS) provided by FICO® LiquidCredit® is employed by lenders when making decisions about small business loans. The FICO SBSS score is used by the Small Business Administration (SBA) for loan assessments of up to $350,000.
When granting credit, lenders often look into UCC-1 Filings. It is essential to understand the Uniform Commercial Code (UCC), even though it is not a credit agency. A UCC filing is a legal document issued by a lender when they sell assets or equipment to a company. The lender may take out a lien against the item, which is then made publicly known to protect their interests. If the business defaults on the lien, the creditor may repossess the property or asset. Having a record of defaults can adversely affect a business’s credit, making it more difficult for them to be approved for financing.
Are Business Credit Scores and FICO Scores Kept Private/Public?
For legal purposes, personal credit scores are kept confidential. However, business credit scores and FICO scores are public information and can be easily accessed by a variety of people, such as banks, auto dealers, real estate agents, vendors, and customers. Poor credit reports are dangerous to your business and may limit your ability to conduct business.
What Should I Do if I Discover an Error on My Company Credit Report?
If you ever observe any mistakes in your business credit or FICO score reports, you can reach out to numerous credit score rating agencies directly.
You should stay on top of the public financial information associated with your business, such as business credit and FICO scores. Since these scores tend to fluctuate frequently, it is recommended that business owners take the time to check them at least once every three months.
No matter how good your credit score is for your company, it is essential to keep an eye on any changes, as this has a major impact on your company’s creditworthiness. If a mistake is identified and reported, it may take several weeks or months before the credit bureaus fully remove it from your record.
It is wise to make payments on time and keep a favorable credit utilization record for numerous reasons, particularly when it pertains to having a good business credit score.
Learn how to read your credit report here.
Can You Check Your Business Credit Score for Free?
Many online services offer business and personal credit scores, but you have to pay for them. As far as personal credit scores are concerned, credit bureaus are mandated by law to provide you with a free copy of your credit report, but there is no such law for business credit scores.
If you’re looking for a business credit report that won’t cost you, an online search with the term “free business credit report” can point you in the right direction. However, be aware of any sites that try to get your personal information in exchange for a “free report.” To ensure your security, it’s recommended that you reach out to the credit rating agencies and Dun & Bradstreet directly, as you can obtain a D&B report without any charge.
- Obtain your Equifax report here.
- Call 1.800.333.0505 for a copy of your D&B report.
Frequently Asked Questions
1. What Can I Do to Increase My Business Credit Score or FICO Rating?
Managing a strong business credit rating can be challenging, however, the effort is worthwhile. It may seem overwhelming at first, however, after your business is up and running, it is simply a matter of forming beneficial credit associations with financial institutions, providers, and buyers.
Ensure that all payments are made promptly or even ahead of schedule and be particularly mindful of those associated with secured assets with UCC (Universal Commercial Code) filings.
Even though a company may not currently require additional funds, it can still elevate its business credit rating by obtaining debt. Credit agencies evaluate the number of business cards that a business uses as well as any other loans that may be outstanding, in addition to how promptly they are repaid.
Most credit-rating companies prefer to see companies maintaining a reasonable amount of borrowed credit, rather than employing their full credit capacity. To prevent reaching the maximum limit on credit cards, one can consider having additional cards.
2. What Factors Have an Impact on a Small Business Credit Score?
It is important to maintain a good business credit score, as it will remain with you forever. If payments are missed or too much debt is accumulated, this will be seen as a warning sign by the rating agencies and possible lenders. Additionally, frequent changes in ownership, restructuring, late tax filings, changing banking institutions, and moving can all cause prospective creditors to be more hesitant to provide financing.
The key to preserving a good credit score is to open a line of credit from a bank and draw on it when your business is flourishing. Demonstrating that you pay off your lines of credit, equipment loans, and credit cards in a timely fashion will help ensure that your business credit score remains high.
Thank you for reading our article. We hope you learned new ways to battle creditors and banks while protecting yourself.
We would encourage you to become a member of HigherScoreNow.com and start to leverage all the benefits of having good credit. You deserve this.