Understanding Your Business Credit Score

Your business may need an infusion of money for a variety of reasons. For example, you may need working capital requirements, equipment purchases, or finances for growth. You might also have a new business idea you want to pivot to that needs financing. The best way to finance these needs might be to take a loan. 

Just like when you take a personal loan, a lender looks at your credit score. When you apply for a business loan, a lender evaluates your business’ credit score before sanctioning the loan.

Beyond loans, a business credit score can impact a wide array of financial decisions for your business. Whether you want to lease or buy a new place to do business, apply for credit cards, or get insurance coverage, there’s a good chance someone will use at least one of your credit reports and score to evaluate you.

So understanding what goes into calculating this number and how to track or improve your business credit score can be a vital piece of knowledge. Read more to learn more.

What is a Business Credit Score? How is it Different from a Personal Credit Score?

Business credit shows lenders, suppliers, and other vendors how financially risky your business is. Much like the individual credit scores that most people are aware of, business credit scores are numbers meant to evaluate the financial standing of a business and its ability to repay loans. The higher the business credit score, the more confident a lender, financial institution, or third party business can feel about completing a financial transaction that requires credit.

Business and personal credit scores are similar in concept. Both are designed to show creditworthiness and evaluate potential risks for lenders or other financial partners. And both business and individual credit scores take into account various factors like the ability to repay debts and make timely payments.

However, the ways in which personal and business credit score is calculated and rated vary. More specifically, most consumer credit rating agencies offer a range between 300 and 850 for individual credit scores. In contrast, most business credit scores are rated on a scale of 0 to 100.

These days, an integral part of your business credit report and score is the Cashflow. Your cash flow is a good indication of whether or not your business has the financial ability to make payments on a small business loan. Lenders want to confirm that you can make periodic payments. Therefore, they will look at things like your past sales, expenses, and future reporting.

Benefits of a business credit score

Building a solid business credit score can help you in several different ways. First, having a good business credit score can help you access credit for your business without leaning on your own personal credit. This means you may be able to access capital to grow your business without using your own individual credit cards or a personal loan. This reduces liability and eases doing business.

In addition, it is also advantageous to keep your personal and business credit and finances entirely separate. For example, keeping personal and business transactions separate can be immensely helpful when it comes time to file your taxes each year. This separation can also help ensure your personal assets aren’t leveraged against you if your business has financial issues.

How is a Business Credit Score Calculated?

A business credit score is calculated based on factors that include debt, payment history, and general risk. Each reporting agency (Equifax, Experian, Dun & Bradstreet, etc.) weighs factors like length of time in business, paying bills on time, late payments, and amount of debt and available credit.

Essentially, almost any financial transaction you make as a business owner can contribute to your credit score. This is why it is so essential to maintain good, organized bookkeeping. 

However, each agency has one has its own specific scoring style and qualifications. Therefore, the score you get from Experian may be different from that of Dun & Bradstreet.

What is a Good Business Credit Score?

As a rule of thumb, the higher the score, the better. If you have a credit score range of 80–100, you have exceptional business credit and shouldn’t have trouble securing funding. 

A score of 50–100 is considered fair, and you should be able to get funding, though maybe at a higher interest rate or more limited terms. Finally, anything below 50 is considered poor credit and a high-risk account.   

How to Maintain and Improve your Good Business Credit

Maintaining a good business credit score can be stressful, but it’s worth it. It may seem difficult initially, but once your business is established, it is a matter of creating good credit relationships with business lending agencies, suppliers, and customers.

Just like with personal credit, your business credit score stays with you forever. Missing payments or taking on too much debt sends a red flag to the rating agencies and prospective lenders. Frequent changes in ownership, restructuring, late filings of tax returns, switching banks, and moving also cause a lending institution to think twice before granting credit.

For instance, paying bills late will have a direct impact on the credit score of your business. Therefore, it’s wise to set out auto payments if you have enough cash flow so your bills are paid on time. However, if paying the total bill on time is not an option, you can still preserve your credit score by making minimum payments on the bills.

Finally, going over your business’s credit score reports from time to time can be very fruitful. Not only will this exercise help you spot what you could be doing differently to improve your credit score, but you may also be able to spot clerical errors made by the credit score company. In addition, this practice will allow you to fix any mistake that might have a significant impact on the final credit score.

Takeaway

Understanding your business credit score range can help you secure funding for startup expenses and company expansion. You can be more aggressive in negotiations with lenders when you have a good score and can take steps to improve it before taking out a loan if you have a poor one. Don’t be afraid of your credit score. Use it to make sound financial decisions for your business.