Is your business incorporated? Do you have an EIN? Have you registered your entity with business credit bureaus? If so, you’re well on your way towards establishing a business credit score. So now the question presents itself: what is a business score and why is it important? Many small business owners might not know what a business credit score is, or does. So, let’s dive a little deeper to provide some clarity on the concept.
A business credit score — also known as a commercial credit score — is calculated from a variety of factor including a business’ credit and repayment history, legal filings, size and years of operation. A business credit score is essentially equivalent to a personal credit score — but, for your business (obviously). It is a numerical representation of the financial status of your business. It helps financial institutions — banks and other lenders, credit card issuers, leasing companies and in certain situations, vendors — evaluate the risk of extending credit to your company.
So, why is maintaining a healthy business credit score important? These financial institutions are essentially counting on you to follow through with your IOU — and so they need something to be able to evaluate your trustworthiness to pay back what you borrowed (prior to fronting you the credit). A healthy business credit score denotes a healthy business. A healthy business means your finances are in check. And when your finances are in check, a financial institution is much more likely to work with your business.
Your business credit score serves as a strong indicator of whether a lender will offer you a small business loan. In fact, it could actually be the determining factor as to whether your credit application is approved. If you are approved for financing, your score also impacts how high an interest rate your business will be charged if you borrow — and the wide range in interest rates can have a significant impact on the total cost of borrowing based on where you fall on the spectrum.
The most simple way to establish credit for your business is by opening a business credit card. Just keep in mind that you will need to be comfortable assuming a personal guarantee in case of default. As you do business, you build a credit report — and this report translates into a score issued by Experian, Equifax and Dun & Bradstreet. Each of these companies calculates your score slightly differently, but here is a quick overview:
Experian considers a multitude of factors: information from firms that have loaned your business money or extended credit, legal filings and background data. Additionally, Experian compares your company’s payment history to other businesses in your industry. All of this information factors into a score that falls between 1 and 100. The higher you score, the lower your risk — and as long as you score above 75, you’re considered “excellent”.
Equifax is similar to Experian, in that it considers numerous factors to calculate your business credit score. Equifax calculates one score for banks (101-992), and another score for suppliers (101-816). A higher score — on either of these scales — is ideal. Bonus: Equifax also provides reason codes so you can make sense of your score, as well as find tips on how to improve it.
Dun & Bradstreet
The PAYDEX score is calculated solely on your payment history, and is evaluated on a 100-point scale. You should do everything in your power to keep your score at 80 or above. If you have a score below 80, it means your business has a history of late payments — so if this is the case, an easy fix is to pay your commitments early.
Your business credit activity — as well as your vendor lines of credit — are reported to Experian, Equifax and Dun & Bradstreet — and that’s how your business credit score is ultimately calculated.
How do you keep your score up to par? First, separate your personal and business finances (if you haven’t already). Mixing these together becomes a nightmare when the time arrives for you to file taxes, apply for a small business loan or do any sort of activity that requires reporting the financial situation of your business.
The best way to maintain your business credit score, or improve a lower score, is to make payments on time. You can also boost your score by maintaining a higher ratio of available to utilized credit. Staying up-to-date on your business credit report is crucial as well — ideally, you should be checking your score every quarter.
Your business credit score is a way to calculate how fiscally responsible your business is as a borrower. As long as you pay your bills, and remain diligent of the factors that determine how your score is calculated, you should have no problem keeping your business credit score in tip-top shape.