The Secret Credit Score Every Business Owner Should Know About, and How to Build Yours
Most business owners understand the importance of having a good personal credit score when it comes to obtaining financing for their business. But that’s not the only score that business owners need to worry about. What’s equally important (if not more so) for business owners is their business credit score. However, according to Creditera, a whopping 60 percent of small and midsized business owners don’t know their business credit scores and 50 percent didn’t even know that they had a business credit score.
A company’s business credit score plays a crucial role for others to determine the approval of various lines of business credit. Therefore, it is vital for business owners to understand what a business credit score is, how it’s calculated, how their personal credit can affect it and what steps they can take to build and/or improve their score.
What is a business credit score?
A business credit score is a reflection of a company's creditworthiness and ranges from 0 to 300. According to Creditera CEO Levi King, your business credit score is important for five main reasons:
- It impacts your ability to get approved for business financing as well as obtain favorable interest rates, particularly from a traditional bank or credit union.
- Commercial partners, like suppliers and vendors, use it to determine extensions of trade credit. If your business credit score is low, you might not be able to get the inventory you need for your business.
- Insurance companies use business credit to determine insurance rates for your business.
- Large corporations and government contracts have minimum business credit score requirements you must meet before doing business with them.
- A strong business credit score protects your personal credit by allowing you to rely on your business assets to carry the load of financing the business. This eliminates the risk of using your personal credit on business and growth opportunities, giving your business access to around 10 to 100 times more credit than you would be able to obtain as a consumer.
How is a business credit score calculated?
In order to build or raise your credit score, you need to understand the basic components used to calculate a business credit score. These include:
- Credit utilization ratio
- Payment history
- Length of credit history
- Outstanding debts
- Public records, such as bankruptcies, liens and judgments
- Company size
- Industry risk
There are three main credit bureaus that calculate business credit scores, and each one does it a bit differently.
- Experian and Equifax -- Puts a large emphasis on a business’ payment history (nearly 50 percent). Other important factors they consider include debt usage and public records.
- Dun & Bradstreet’s PAYDEX -- Determines a business credit score based solely on payment history to trade partners (insider tip: Pay early each month for a perfect score).
- FICO’s SBSS -- This is the industry standard for determining business financing. It assesses your personal credit history, business credit history and business financials to determine your business credit score. It combines them all for a global view of a business owner's credit health.
What many business owners don’t understand is that reporting to these credit bureaus is done on a voluntary basis. You could theoretically be in business for many years and still fly beneath the radar of the business-credit reporting agencies simply because nobody bothered to provide any relevant data about your business or other credit-related activity. You will want to follow certain standard procedures and strategic steps, as it’s important to be proactive about setting up good credit as a business.
How does personal credit history affect a business credit score?
When new business owners are just starting out, their personal credit will play a larger role in their ability to get business financing because they have yet to establish a credit history with their business. Be sure to check your personal credit score using a free service, such as Credit Concierge, to make sure your personal credit is in good standing before applying for a new business loan.
Keep in mind, however, that it is important for business owners to take immediate steps to separate personal credit from business credit as soon as they can.
How to build and maintain a strong business credit score
- Never miss a payment. Pay all business-related bills on time or earlier if you can.
- Use business credit cards to make purchases instead of cash, checks or debit cards.
- Maintain a low credit-utilization ratio. Credit utilization is the percentage of the available credit you are actually using. Consider opening multiple credit accounts such as business credit cards, trade lines and loans, and use only 25 percent of your available credit (note: Never open a line of credit if not absolutely necessary).
- Regularly monitor your business reports and scores by registering with one of the four credit bureaus mentioned above. Checking your business reports for errors is crucial. It's common to find data errors on business reports that can impact your score. Using a monitoring service to receive 24/7 alerts will ensure you're protected if anything questionable appears on your report.
Your business credit score can singlehandedly make or break your chances of getting financing for your business. Therefore, it is crucial for business owners to build a solid business credit profile to ensure that they are able to sustain operations seamlessly, have access to financing when and if they need it and protect their personal credit by separating it from their business.