By Tom Flynn, LendEDU
You know that you have a personal credit score and that doing things like paying your bills on time and not charging up your cards help you build a great score. But what about your business? Not only do you have a business credit score, but there is likely a lot you don’t know about it.
While you might expect that your business credit is calculated similarly to your personal credit score, you would be wrong! There are some important differences that you should be aware of in order to ensure you build great business credit that will allow you to borrow more at better rates in the future.
Factors That Determine Your Business Credit Score
The first thing that you need to know about your business credit score is that, unlike a FICO score that gives you a score along a range between 300 and 850, a business credit score ranges from 0 to 100.
Just like your personal credit score, there are three credit bureaus that calculate scores for your business, but they’re different than the ones that calculate personal credit. Your business credit is calculated by Experian and Equifax just like your personal credit but, instead of TransUnion, the third bureau for your business credit is named Dun & Bradstreet.
It’s important to note that each of the credit bureaus calculate your business credit slightly differently. Given that caveat, there are some things that you can do to boost your business credit score that will work across all the bureaus.
For example, paying your creditors on-time or early will always boost your score since and if you are late on payments , that willwill decrease make your score go down.
Another factor that determines your score is how long that you’ve had credit accounts. That’s why it’s critical to start establishing your business credit right away.
Some factors that you might not expect to have an impact on your business credit are things like how many employees you have and whether you pay your suppliers on time. The more employees you have the better your rating could be since bigger businesses are thought to be more stable. In addition, business credit reports take into account your payment of non-credit related invoices like trade lines.
The Importance of Building Your Business Credit
There are a lot of reasons why it makes sense to focus on building your business credit. The first reason is that if you don’t have a business credit score, you’ll have to use your personal credit in order to borrow money via a small business loan or a small business credit card.
But even if you have great personal credit that doesn’t guarantee anyone will lend to you. For example, if you were to quit your job to start your business, you might struggle to get a lender to give you a loan even if you have great business credit and lots of money in your savings account because you might not have a track record of making self-employed income.
Even if you do have a track record of business income, if you’re using your personal credit, you’ll only be able to borrow as much as you’re personally approved for based on your income and existing debt obligations. Have a mortgage? An auto loan? Personal credit cards? Those loans will reduce your capacity to borrow for your business since many lenders look at your debt-to-income ratio before lending money and try to ensure that it’s below 36% - the amount most lenders prefer. But your personal capacity for repayment might be very different than your business’ capacity. So, if you’re able to borrow using your business credit, you could potentially borrow significantly more money and potentially at a lower rate.
You might not think that you’ll need to borrow money when you start your business, but it’s important to keep your personal and business finances separate, both for accounting purposes and because if you’re starting an LLC, you might be legally required to separate your finances in order to keep your business legally separate. At some point, you’ll likely want to get a small business credit card.
You also might need a small business financing to buy new equipment, hire new staff, or even just to facilitate cash flow so that your business can succeed and grow.
Another reason why you might want to build your business credit is that your insurance rates could go down if you have great business credit. Who doesn’t want to save on insurance?
Finally, unlike your personal credit, your business credit score is public knowledge that anyone can apply for access too. That means that your potential customers could see your business’ credit and some might even decide whether or not to award work to your firm based on your company’s credit score.
How Can You Improve Your Business Credit
The first thing that you should do when you open your business is start establishing business credit. You can do this by taking out a small business credit card or a small business loan. This ensures that the business credit bureaus open a file on your business and since one of the factors that calculates your business credit is the length of your accounts, this will help you establish a good score.
Another thing you can do is ask your suppliers to extend you trade credit. That means that you aren’t required to pay them immediately, but within a few weeks or months. Many of these suppliers will report your payments to a credit bureau. If you don’t need a small business credit card or small business loan, then getting four trade credit lines that report to credit bureaus could be enough to open a credit history in your business’ name. If your suppliers don’t report to the credit bureaus, you can still list them as references on your credit account.
Another important thing to do is to makes all your payments on time or early. In fact, Dun & Bradstreet will only give out perfect credit scores to those who pay early.
You should also make sure that your credit utilization is within the ideal range. If you have small business credit cards or a small business line of credit, you shouldn’t max it out. To get the best score, you should only ever use 20% to 30% of your credit at any one time. Already using more than that? You can apply for an increase to reduce your utilization.
Another thing to watch out for is that your credit information is accurate with all three bureaus. You can do this by getting a copy of your credit history once per year and making sure that everything is correct. Unlike with your personal credit, you aren’t entitled to a free credit history once a year. You’ll have to pay for it and, since you don’t know which credit bureau your creditors will use, you’ll need to get your history for all three bureaus. The cost for getting your credit report can range from around $40 to $100, depending on the credit bureau.
The Consequences of Having a Low Business Credit Score
If you don’t want to borrow money via a loan and you are fine paying a little extra for insurance because your business credit isn’t ideal, you might not think that having low business credit is important to your business. But you would be wrong. Unlike personal credit scores, business credit scores are public. That means any business who does business with you or is thinking of doing business with you can look up your business credit score.
Having low business credit could impact your ability to get business, especially government contracts because people might be afraid of your company’s solvency and trustworthiness if you don’t have a business credit score or if your business credit score is low.
How Do Business Credit Scores Vary?
So, you know that business credit scores vary across the three different business credit bureaus, but you might wonder exactly how they vary at each bureau? While each bureau rates you from 0 to 100 on business credit, the algorithm they use to arrive at that number can be slightly different. Also, each bureau has other numbers that they calculate to give you a score meant to measure other things like the likelihood your business will fail.
Experian offers what they call a CreditScore report on the businesses it ranks. This includes things like your business credit score, but also includes additional information including your account histories, public records, and payment trends. Their credit score takes into account things outside your credit history including your company’s background info, legal filings, and information from suppliers or lenders.
They look at your balances on your existing loans, whether or not there are liens against your business, whether there are judgements or bankruptcies, the age of your business and the number of employees that you have.
They do make it harder to get a good rating if you’re a smaller business – which they will usually give a medium to low risk of defaulting versus larger businesses which they’re more likely to give better ratings to.
Equifax assesses businesses in three different ways. They have a Payment Index, a Business Failure Score, and a Credit Risk Index.
When it comes to the Payment Index, the scale is from 0 to 100 and your score is based on whether your company pays its bills on time. It uses data from suppliers and creditors. This score is meant to show past behavior, but not to predict future actions.
Their other two scores are meant to predict your company’s future financial health. The Business Failure score estimates on a scale from 1,000 to 1,600 your likelihood of closing in the next 12 months. To get this score, it looks at things like the age of your financial accounts, how much of your credit limit you’ve been using in the last three months, whether you’re behind on your credit accounts or bills, and evidence of being late on supplier invoices.
The Business Credit Risk score measures on a scale from 101 to 992 whether your company is likely to get significantly behind on debt payments in the future. They look at your company’s size, the available credit you have on credit cards or lines of credit, the age of your financial accounts, and things like being late on invoices.
Dun & Bradstreet
Dun & Bradstreet creates a score called the Paydex score which ranges from 0 to 100 to measure your business’ credit. They also have two other scores known as the Financial Stress Score and the Commercial Credit Score.
To get a Paydex score, you need to have a DUNS number. You can get one online at Dun & Bradstreet’s website. The bureaus also needs to have payment records for at least four vendors in order to score your company.
To get a good Paydex score, you should repay debts on time or early and ask your suppliers to report your payment history to Dun & Bradstreet.
A Commercial Credit Score ranges from 101 to 670 and measures the likelihood that you will get behind on your bills in the next 12 months.
Your Financial Stress Score tries to predict how likely your business is to file for bankruptcy or close within the next year. This score ranges from 1,001 to 1,610.
How to Obtain Your Business Credit Scores
If you want to stay on top of your business credit, you need to check it at least once a year or before you plan to apply for credit. That will help you ensure that it’s accurate and correct any mistakes. Because you don’t know where your potential lenders might check, you should make sure to get your credit report from each of the bureaus.
- You can access Dun & Bradstreet’s business credit report on their website and it will cost you $61.99.
- Experian can be accessed here and will cost you $39.95.
- Equifax’s credit report can be accessed here and will cost you $99.99.