You know a good personal credit score is critical for getting the best rates on everything from credit cards to mortgages and car loans. But did you know your business credit rating is just as important to the health of your business?
If you have questions about establishing business credit, how to check business credit or even your business credit score range, consider this your go-to guide to building a business credit report.
What Is A Business Credit Score?
The easiest place to start is to compare it to a personal credit score.
A personal credit score typically falls between 300 and 850—with a score of 670 and up considered good or excellent. It is derived from data that is reported to three nationwide consumer credit bureaus: Equifax, Experian and TransUnion.
Each of those bureaus then creates a FICO® Score, the credit score created by Fair Isaac Corporation, which is used to make lending decisions. It takes into account your credit history— how many accounts when they were opened and your utilization rate—along with your history of on-time payments and the different types of credit you have. Roughly 90% of all lenders use a FICO score; in other words, there is an accepted formula, and the rules are well known.
Business credit scores, however, don’t have the same uniformity. In fact, there are four companies that establish business credit ratings, and the scoring algorithms and calculation methods used to produce these business credit score ranges vary.
The four main commercial scoring systems that are used to check business credit – and the scores they look for — are:
- Dun & Bradstreet’s PAYDEX Score: Lenders look for a business credit score of 80+ on a 0 to 100 scale.
- Experian’s Intelliscore Plus: Lenders look for a business credit score of 80+ on a 0 – 100 scale.
- Equifax Business Credit Report: Lenders look for a business credit score of 570+ on a 101 to 992 scale.
- FICO’s Small Business Score: Lenders look for a business credit score of 140+ on a 0 to 300 scale.
The last one is particularly important since your FICO SBSS also incorporates your personal credit score, creating a “hybrid score.” Since the small business owner and their business are often inextricably combined, this score has become a key factor in assessing and establishing the business credit validity of small businesses.
Why Your Business Credit Report Matters
Just as your personal credit score influences whether you will be approved for a credit card or get a great interest rate on a new loan, your business credit score impacts your ability to be more agile with your company finances.
That’s because suppliers and lenders will check business credit to:
- Elect to do business with your company
- Decide whether to give you a loan
- Determine insurance premiums and interest rates
- Establish payment terms
- Choose whether your account should be sent to a third-party collection agency, should you become delinquent….what we will call the “benefit of the doubt” clause.
As you can see, your business credit report can have a profound effect on your small business’ success.
Establishing a Business Credit Score
Wondering how to establish a business credit score? The steps are similar to setting up your business and include:
Establish a business structure: If your business is a sole proprietorship, it will be more challenging to keep your business and personal finances separate and establish stand-alone business credit. Consider whether forming an LLC or corporation could be the right structure for your business.
Register for an Employee Identification Number (EIN): This 9-digit number, like a Social Security number for businesses, is assigned by the IRS. Your EIN is needed to apply for a business permit, open a business bank account or credit card and other business activities. Every company with an established EIN also has a business score.
Separate your business and personal finances: Opening independent business banking accounts and credit card accounts establishes you as a legitimate business and can streamline accounting and tax preparation.
Seek business credit: Depending on the type of business you run, having credit available can be valuable to take advantage of growth opportunities or to supply a financial cushion should you run into a cash flow crunch. It also helps you manage your credit utilization; that is, how much of your available credit you are using. The optimum ratio is using less than 30% of each line of credit.
Obtain a business loan: Business loans and lines of credit are powerful tools for funding necessary expenses, such as hiring and marketing, or covering unexpected emergencies without tapping a high-interest credit card. They also present an excellent source for building your business credit rating.
Improving Your Business Credit Score
A business credit score range is used to assess your “creditworthiness,” or how likely you are to meet your business obligations. Although, as mentioned, each of the agencies use a different algorithm and methodology, the basics will be the same for all.
The good news is that most of the habits you use to boost your personal credit score apply to your business credit score as well. Just as you display responsible financial habits by living within your means personally, you need to do the same with your business. To help boost your credit score, make sure you do the following:
Make timely payments: You can be assured that all agencies place premium weight on one factor—the payment history you have with suppliers, creditors and lenders. Building a strong balance sheet to make sure that funds are collected and disbursed on time is pivotal to all aspects of your business, including your ability to build and maintain a high business credit score.
Work with partners and suppliers who report to the business credit bureaus: You can be doing everything right in payment land but if your good work is not being reported to the bureaus, it doesn’t matter. Verify that the vendors you work with report payments and if not, consider working with those who do.
Pay down outstanding balances: Credit utilization—that is, how much of your available credit you are using—is another factor that impacts your business credit score. So make paying down hefty balances a priority. First, focus on those accounts that have the highest interest rate, and then move down the line, paying off creditors according to the interest rate.
Keep accounts open: Even if you don’t use a given card anymore, closing too many accounts limits how much credit you have available and can also ding your score. It might be worth it to keep a credit card open—without a balance of course—and potentially even keep one recurring bill, say, your cell phone or a utility bill, on it to keep it active.
Talk to your creditors: Managing the finances of a small business can be tricky. After all, if a client doesn’t pay you in a timely manner, you, in turn, may not be able to pay the person you owe. And while your suppliers might be willing to work with you, they don’t know your situation if you don’t tell them. If you find yourself struggling with your accounts payable, let creditors know what’s going on with your business and make a good faith effort to pay down your bills. You may find them amenable to working out a payment plan directly with you instead of reporting the late payment to the credit reporting agencies.
Check your business score regularly: You are probably wondering how to check a business credit score so you can see what your potential business partners are seeing. Unfortunately to check business credit scores is not as simple as personal credit scores. That’s because unlike personal credit scores, there are no “free” avenues for a business credit check. However, it’s worth it to contact the bureaus and request a report to make sure there is no erroneous information. Checking a business credit score can range in price from $50 to $300.
A solid business credit rating is crucial for success as a small business. By focusing on how to build business credit and taking the steps for establishing business credit that’s strong, you will be establishing a foundation for taking your enterprise to the next level.