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. The three major business credit reporting bureaus, Dunn & Bradstreet, Equifax, and Experian all use different scores and focus on slightly different aspects of your business credit profile. While all three bureaus look at business-to-business data, bank data, and information pulled from the public record, they specialize in different parts of your credit profile. 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. This score is based entirely on payment history. To earn the highest score, you must pay your bills before their due dates. PAYDEX is primarily used by vendors and suppliers to judge your business when determining what terms to extend on trade credit (e.g., net 30, net 60, etc.). Typically, the better the score, the more generous the terms extended. This is important because having more time to pay your bills can help you better manage cash flow.
- Intelliscore Plus: Produced by Experian, Intelliscore Plus also runs from 1 to 100. A Higher scores indicate lower risk, so as a business owner, you want to aim for a higher score. Medium credit risk is associated with a score of 26 to 50, with the lowest-risk scores over 75. There are over 800 variables that can go into these scores, including tradeline and collection information, public filings, new account activity, key financial ratios and other performance indicators. But the bottom line is paying on time and managing debt well will help build a strong score. Experian also offers a version of Intelliscore Plus that can evaluate data from the owner’s personal credit report as well as business credit.
- 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.
- FICO SBSS: Produced by FICO, the LiquidCredit Small Business Scoring Service, also known as SBSS, ranges from zero to 300. The higher the score, the better. FICO’s Small Business Scoring Service (SBSS) rank-orders applicants by their likelihood of making payments on time. The scoring can use both personal and business credit data and other financial information. A strong history of business credit with timely payments to vendors and suppliers may help boost your SBSS score. This score is frequently referenced when underwriting Small Business Administration-guaranteed loans. The FICO SBSS score will be used for term loans, lines of credit, and commercial loans up to $350,000 from the Small Business Administration (SBA). The minimum score to pass the SBA’s pre-screen process is currently 140.
How business credit scores are used
Lenders and other creditors need a means of determining how well your business repays debts before they will approve you for financing. This is where business credit scores can come in. Higher scores indicate to creditors that your business is more likely to pay bills on time, thereby improving the odds that you can obtain financing. Lenders can check your company’s business credit reports to get more detailed information about your business’s financial history, and business credit scores serve as shorthand evaluations. Here are three other ways your business credit scores may be used:
- Determine your borrowing power. Your business credit report and score can determine how much financing you are able to secure.
- Determine your rates on business insurance. Some insurance providers evaluate a business owner’s credit as well as the business’s credit to determine rates on commercial insurance.
- Get more time to pay. Vendors and suppliers may look at a business’s credit reports or scores to decide how long to give the business before payment is due for goods and services. Net-30” terms would mean your business has 30 days to pay, while net-60 terms gives you 60 days to pay. Securing longer terms on your terms with suppliers is a great way to improve cash flow.
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:
- Credit utilization ratio: How much of your available credit you’re actually using.
- Payment history: How often you paid bills late or had debts sent to collections.
- Age of credit history: The length of time your loans and lines of credit have been open.
- Existing debts: What loans and lines of credit are currently open in your business’s name.
- Public records: Bankruptcies, liens, legal judgments and UCC filings.
- Company size: Number of employees on your payroll.
- Industry risk: Predominantly determined by the industry in which your business operates.
- Number of recent credit inquiries: How often you’ve been actively applying for loans and new lines of credit.
How to Improve Your Business Credit Profile
There is no quick fix for a less-than-perfect credit profile and it takes time for a new business to build business credit, but here are five things you can start doing now that will help you build a strong foundation:
- Make sure your profile is accurate: It’s not uncommon for business owners to find errors in their profile. Fortunately, the business credit reporting bureaus (the three biggest are Dunn & Bradstreet, Equifax, and Experian) are motivated to make sure their data is accurate. Since they sell access to their information to lenders, inaccurate or out-of-date information isn’t very valuable—all three have processes in place to resolve legitimate disputes and correct verifiable errors. What’s more, sometimes even minor errors in your profile can make it more difficult for your business to qualify for a loan.
- Keep your personal and business credit separate: This can sometimes be a challenge for business owners—particularly during the early years when business credit is harder to come by. Nevertheless, finding ways to establish business credit and avoiding the use of your personal credit is a good practice. For example, instead of using your personal credit cards, apply for a business card. The higher balances that often accompany business expenses can actually hurt your personal credit score because 30 percent of that score is a reflection of how much credit you have compared to how much credit you use. This is true even if you pay the balance down to zero at the end of every payment cycle. What’s more, using your personal credit card does nothing to build a stronger business credit profile, which will make it harder to access a business loan down the road.
- Establish trade accounts with your suppliers: This is one of the best things you can do early in your business to build a strong credit foundation. In a recent conversation with Experian’s Peter Bolin, he mentioned the importance of building these relationships for new businesses. When talking about a recent Experian study looking at credit use among startups, he suggested “…the average small business owner [of those studied] is creating 1-1/2 trade credit relationships each year and using smaller loans to build their credit profiles over the first few years. Ultimately indicating to us that many of these businesses are great borrowers.” This credit is relatively easy to get and a great way to build a strong business credit foundation. For example, Home Depot and Staples both offer credit accounts for small businesses and sell products most businesses regularly use. They also report your credit history to the bureaus, so can be a valuable tool to building good credit.
- Make sure your suppliers report your good credit behavior: If your suppliers don’t report your good history to the bureaus, you may be building a good credit reputation with that particular vendor, but you’re not doing anything to build a good credit profile. This is important enough that you should ask every vendor you work with and seek out those that do.
- Use the credit you need and stay current: The single biggest thing you can do to positively impact your business credit profile is to make regular and timely payments on your business credit accounts. Avoiding the use of credit entirely isn’t a good long-term strategy because building a strong profile is about demonstrating that you know how to effectively leverage credit when you need it and that you will make the periodic payments on time when you borrow.
How to Check Your Business Credit History
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. 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.
If you liked this thought, you may enjoy the free video entitled The Financials – Managing Your Business Session 1 Understanding Key Concepts.
Copyright ©John Trenary 2021