Your company has incredible financial powers. In the name of your business, you can open credit cards, apply for loans and even get office space and vehicles. And, along with those abilities comes a system…
Your company has incredible financial powers. In the name of your business, you can open credit cards, apply for loans and even get office space and vehicles. And, along with those abilities comes a system for evaluating your company’s financial health — a business credit score.
When considering business credit products, you should understand the anatomy of a business credit score, why your company’s credit history matters and what steps you can take to maximize your appeal to lenders.
What Is a Business Credit Score?
As an individual, you most likely have a consumer credit score, a measure of your creditworthiness that allows lenders to compare you with other people. It’s a single number that’s built using data from your detailed credit report.
Likewise, your company may have its very own business credit report and business credit score. And that score quantifies just how financially responsible your business is.
When it comes to your personal credit score, FICO and VantageScore are the two most popular credit scoring models. But, for your business, these scores dominate the financial arena:
— Paydex: Produced by Dun & Bradstreet, Paydex ranges from 1 to 100, a perfect score. Typically, a score of 50 to 79 is considered medium risk, while 80 and above denotes a low-risk score.
— Intelliscore Plus: Produced by Experian, Intelliscore Plus also runs from 1 to 100. Medium credit risk is associated with a score of 26 to 50, with the lowest-risk scores over 75.
— Equifax scores: Equifax produces a number of scores, each based on your business’s credit report and used for a specific financial purpose. For a business in its database, you may have a variety of delinquency and failures scores.
Your business’s credit history may be secondary to your own if you’re not operating a large company, says Ryan Conti, director of sales at Fundera, an online marketplace for small business financial products. “If a business is small (less than $1 million in revenue) or only has a few employees (fewer than 10), the fate of the business is intimately tied with the business owner,” says Conti. “They are the business and the business is them.”
But staying afloat as a growing business necessitates your involvement in financial transactions beyond your personal finances. And the quality of your credit may come into play when you deal with:
— Product suppliers
— Other businesses for services
— Banks for loans
— Insurance companies to protect your company against disaster
— Landlords for commercial property leases
And many of these entities with which you interact may choose to examine your business credit score before working with you. A great score can position you to nab the best terms and lowest rates. And that, in turn, can boost your business’s bottom line.
But a lousy score may prompt vendors to move up due dates for bills, banks and credit unions to deny loan applications, and insurers to hike up your business insurance premiums. “Having bad business credit will not always be a deal breaker when it comes to loans and other products,” Conti says, “but will likely yield higher interest rates.”
And keeping your head in the sand can be dangerous, warns Gerri Detweiler, education director at Nav, a fintech company that serves business owners. “The biggest difference between business and personal credit is that there is no federal law that covers business credit reporting,” she says. “There’s no requirement, for example, that if you get turned down based on your business credit that they have to notify you of that fact and tell you where they got the credit report like they do with consumer credit.”
What Does a Business Credit Score Measure?
Each lender has its own set of criteria for evaluating the financial risk your business presents. And each agency that produces a business credit score has its own methodology for computing that number.
However, some areas of your business’s credit report are of interest across the board. And the factors most likely to influence the value of your business credit score are:
Want to take a peek at your business’s credit report or score? Remember that each credit reporting agency compiles its own report on you. To have a look, visit the agency’s website and search for your report by business name, country and state where your company operates. You’ll also need to know your business’s nine-digit D-U-N-S number if you’re accessing credit data through Dun & Bradstreet.
Here’s each agency’s site for requesting a copy of a business’s credit report:
Once you find a listing for the report or score, you’ll pay a fee of anywhere from $40 to $160, though you can access some business credit reports for free if you sign up for a Nav account.
It’s important to note that your personal credit report is protected from prying eyes by law, but your business report is fair game. “Anyone can access your business credit information as long as they want to pay for it,” says Detweiler.
How to Improve Your Business Credit Score
If you’re eager to start your business’s credit history on the right foot or beef up your appeal to lenders, there are a number of steps you can take to get there.
Establish your business as its own entity. Sole proprietorships and fledgling businesses may wind up using the owner’s personal credit history and financial accounts meant for individuals. To build and access your business credit, however, draw clear boundaries between you and your company. Register your business with federal and local governments, incorporate or form an LLC, and use your federal Employer Identification Number in lieu of your personal Social Security number.
Get noticed for your responsibility with money. “You will have to be more proactive than you will with consumer credit,” says Detweiler of business owners. She notes that consumer loans and lines of credit tend to be reported to major credit bureaus automatically, but business lenders may not report at all or may offer data to only a subset of the credit bureaus.
To start building a history from scratch, Detweiler suggests opening a business credit card that reports to business credit agencies and working with vendors and other businesses that report directly to credit agencies.
Pay your debts on time. One of the most important ways to influence your business credit score is to stay on top of your company’s bills. Make sure that you’re paying the amount owed toward loans, lines of credit, supplier invoices and other forms of business debt every single month.
Consider paying your bills earlier than they’re actually due. Only early payers qualify for a perfect Paydex score of 100.
Limit how much debt you carry. The amount of available credit you use matters in the calculation of your score. So, whenever possible, aim to use less than 25 percent of your business credit limits. If you’re already tapping into a large percentage of your available credit, potential lenders may worry that you’re currently overextended and likely to default on future loans.
Don’t avoid credit entirely. The best way to prove that you’re a good credit risk is to show a history of solid financial management. And that means using enough credit to get noticed but not overwhelmed. “You want a few open accounts but not too many,” says Conti. Consider diversifying so you have a mixture of loans, credit cards and other forms of credit.
Check your business credit report. Though you’re entitled to view your personal credit report at no cost each year, you’ll have to pay to view your business’s credit report. Be sure to look for errors, omissions and indicators of fraud. Bad data can scare off lenders and damage your score. If you find issues, seek a resolution through the reporting agency’s dispute process.