Just as the bank reviews your personal credit score and credit history when you apply for a car loan or mortgage, creditors review your business credit score and history when your business applies for a credit product. Your business score tells them how much of a credit risk your business poses based on past financial behavior.
“Many business owners just don’t know that these reports exist and potentially have an impact on their business’s financial life,” says Gerri Detweiler, education director at Nav, a business credit and financing resource. Nav joined in conducting a 2016 survey that found that 72 percent of small business owners didn’t know their business credit score, and 60 percent didn’t know where to find it. A smaller 2015 Nav survey found that small business owners who understood their business credit scores were 41 percent more likely to be approved when they applied for a business loan.
Why Your Business Credit Score Matters
Whether you need to be aware of your business credit score depends on the type of business you own. Some business owners, such as freelancers who do not expect to have employees or require significant capital, may never encounter a need for business credit products.
The most essential question is whether your business might need financing or other types of credit in the future. If the answer is yes, you should find out your score and take steps to build a healthy credit history for your business.
“If you’re seeking government contracts or [a Small Business Administration] loan, or your company may need to do business with multiple vendors, you should pay attention to maintaining a healthy business credit score,” says Detweiler.
Even very small businesses may have a need for credit. A carpenter with no employees may want to borrow money to buy equipment. A marketing professional with a few employees may be ready to purchase furniture and computers for a new office. A salon owner with subcontractors but no employees may want to buy, rather than rent, commercial property. When it comes to the size of business that may need credit products, there is no lower limit.
[Read: The Best Business Credit Cards of 2018.]
Business Vs. Personal Credit
In some ways, business credit scores are like consumer credit scores. They fall within a range, and the higher the score, the lower the perceived risk. Businesses with higher scores have a better chance at securing financing, and in general, scores are inversely proportional to interest rates.
In other ways, business credit scores are unlike consumer scores. While the scores generated for consumers by FICO and VantageScore range from 300 to 850, a business credit score might range from zero to 100 or from 1,000 to 1,880, depending on the scoring model.
In addition to general credit data such as the number of open accounts, balances and credit limits, your business credit report can also include information about your company, your industry, public records, your payment index (when your company pays its bills relative to the due date) and financial data including bank account balances.
One big difference between business and personal credit is that there is no federal law governing business credit reports. Since business credit and lending are not covered under the Fair Credit Reporting Act, anyone can access your business credit information, with or without your permission, says Detweiler. She also notes that you don’t have the right to request a free copy of your business credit report every year, and you cannot freeze your business credit report.
Types of Business Credit Scores and Where to Find Them
Experian, Equifax, FICO and Dun & Bradstreet are some agencies that provide business credit scores.
Experian Intelliscore Plus: This score ranges from 1 to 100 and predicts your business’s likelihood of serious delinquency in the coming 12 months.
Equifax business risk scores: Equifax offers several different scores. For example, the Equifax Business Delinquency Score ranges from 101 to 662 and reflects the risk of severe delinquency on any account.
FICO SBSS: This score ranges from zero to 300 and is based on a combination of factors that include business and personal credit history. The SBA consults the FICO SBSS to evaluate applicants.
Dun & Bradstreet Paydex: This score ranges from 1 to 100 and shows not just whether you pay your bills on time, but also when you’ve paid. “The Dun & Bradstreet performance-based rating is designed to predict the reliability of the company, and the likelihood that the business will pay its bills on time or experience financial distress,” says Amber Colley, senior vice president at Dun & Bradstreet.
You generally cannot access your business credit reports or scores for free, but some online companies offer free trials that will let you, including Nav and Credit.net. Dun & Bradstreet offers a free service called CreditSignal that alerts you to changes in your business credit report on an ongoing basis.
Business Credit Score Factors
Business and personal credit scores are based on some of the same factors, like payment history and credit utilization, but business credit scores also take into account other factors, like the size of your business and industry norms.
“In the construction industry, it’s normal to pay your bills when you get paid by your clients,” says Colley. Thus, some industries have a longer “normal” bill-pay lead time than others.
[Read: The Best Cash Back Credit Cards of 2018.]
Furthermore, each business credit scoring agency collects a different set of data and has its own process for calculating your score. This is true even if the scoring ranges look similar.
Detweiler notes that although credit mix is not as important for businesses as it is for consumers, Experian risk scores take into account a larger number of factors — versus, for example, the Paydex score. “Among them could be things like types of credit, overall limits and so on,” she says. “Creditors may be looking for that type of information, for example, to see what your business’s experience is with larger transactions.”
Don’t expect to see the same level of detail on your business credit report that appears on your consumer credit report. The number and types of trade lines, as accounts are called, will appear, but not the names of the companies reporting the data. Instead, each account will be placed in a category.
Business payment history is not reported the same way consumer credit history is. It is shown in the context of days beyond term, or DBT. “If the agreement with your creditor is Net 30 and you pay on Day 35, your DBT is 5,” says Detweiler.
Business credit reports not only show when you pay your bills, but also whether you pay early, particularly with the Paydex score, which is strictly based on payment history. “Some companies pay before they even get the bill,” notes Colley, “in order to later use their Paydex score as leverage for better terms.”
How to Build Up Your Business Credit
Before you can boost your business credit score, you need to establish a business credit file. This doesn’t happen when you file a fictitious business name statement or obtain a business license. Certain steps, however, will fast-track the creation of your file:
— Incorporate or form a limited liability company.
— Obtain a federal Employer Identification Number, or FEIN, from the IRS (free).
— Obtain a DUNS number from Dun & Bradstreet (free).
— Open business bank accounts in your legal business name.
— Obtain a listed telephone number in the business’s name.
Micro business owners who have no plans to incorporate can generate a business credit file even without a business phone listing. But you may need to pay closer attention to the other legwork. For example, start with a fictitious business name statement, an FEIN, a DUNS number and a business bank account. Then apply for a loan or credit card in the business’s name.
Once the file exists, there is no fast track to a healthy score. “Be proactive, not reactive,” says Colley. “If you’re brand new, take on business credit. A personal guarantee may be required, but include your DUNS number with the expectation that over time, once your business has proven that it pays on time, you can request to remove the personal guarantee and rely solely on business credit.”
To build your payment history and other data, establish accounts that are reported to credit bureaus. “Dun & Bradstreet requires three accounts to generate a Paydex score,” says Detweiler. “For Experian, a report and Intelliscore can be generated with just one account.” In addition to a business credit card, open a trade account in the business’s name with a vendor that reports.
[Read: The Best Travel Rewards Credit Cards of 2018.]
Unfortunately, there is no publicly available list of vendors who report business account activity to the credit reporting agencies. “That can be frustrating for a new business,” says Colley. Major banks and lenders are all but guaranteed to report. Large vendors, like Home Depot and Lowe’s, are known to report commercial account data. You can also ask the vendor directly.
Dun & Bradstreet has a solution for establishing a business credit score with trade lines that are not reported. Business owners can provide vendor and account information, and Dun & Bradstreet will reach out to vendors to verify the details. “There is an opportunity for a small company to play an active role in building business credit by providing the names of creditors who may be outside the group of larger creditors who are reporting,” says Colley. This service is not free, and costs vary depending on the level and complexity of service.
What to Do if You Have a Bad Business Credit Score
Check your credit standing well before you need to seek business credit. Like consumer credit, your business credit history and score will take time to build. But what if your score isn’t up to par?
Check for errors. Monitor your business credit report just as you monitor your personal credit report. If you find an error, each reporting agency has a process in place for disputes. Address every error, no matter how insignificant you think it may be. Even an incorrect industry classification code can affect your ability to obtain credit at the most favorable terms.
Colley notes that any business can update its company data — not financial data — for free online. An accurate listing is one way you can avoid other companies’ data from getting mixed up with yours.
Business credit reporting agencies are not subject to laws relating to correction of errors on reports. There is no industry-wide standard process for disputes. Also, reporting agencies are not required by law to notify you of adverse actions taken based on the information in your file.
Since the names of creditors are not listed on business credit reports, it can be difficult to know what creditor is reporting erroneous information.
Pay on time and keep utilization low. A low score may not be due to an error. You can improve it by paying on time (or early) and keeping your credit utilization ratio low.
Business credit utilization is not reported the same way as consumer credit utilization, because accounts may not have credit limits. Business credit utilization reflects the ratio of account balances to recent high credit balances, the ratio of delinquent balances to credit limits and balances carried in relation to others in the same industry.
Be smart with credit. On an ongoing basis, handle your business credit responsibly. For many accounts, particularly for smaller businesses, the owner will need to provide a personal guarantee. If the account goes into default, it will show up on the owner’s personal credit report.
“Your business and personal credit reports can overlap,” says Colley. “As the company grows, so does your personal liability. Ultimately, you should try to separate your business credit from your personal credit to protect your personal credit if the business experiences financial distress.”
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