Understanding Your Business Credit Score

Table of content

• What is a Business Credit Score?
• How Is a Business Credit Score Calculated?
• Business Credit Scores Are Vitally Important For Your Business.
• How Is Your Business Credit Score Different from Your Personal Credit Score?
• How to Improve Your Business Credit Score
• How can a small business loan from Credibly help build your company’s business credit score?
• Frequently Asked Questions (FAQs) About Business Credit Scores

No matter what kind of business you own, you’re bound to be affected by your business credit score at some point. Much like your personal credit score, the credit of your business can impact your ability to get funding, your ability to secure a product, and even your ability to expand into other locations in certain cases.

Even if you frequently monitor your personal credit score and understand how credit works, business credit can be a pretty unique beast on its own.

What is a Business Credit Score?

Let’s start at the top. Much like personal credit, a business credit score is a number that represents a company’s ability to pay back its debts. A number of factors can go into how this score is calculated (which we’ll explore in more detail later on), and each business’s credit score is tracked by the company’s name, address, and either their federal tax identification number (FIN) or their employer identification number (EIN), similar to how a private citizen’s credit is tracked via their social security numbers.

How Is a Business Credit Score Calculated?

Business credit is calculated using a number of factors, primarily relating to the financial history of your business and its ability/willingness to pay back outstanding debts. A few of the most common and heavily weighted factors in this decision include:

• Credit utilization ratio: how much credit your business has available to it (through business lines of credit, loans, etc.)
• Payment history: how many payments your business has successfully made on time to its debtors, whether for tax payments, property rent, outstanding loans, and so on
• Length of credit history: how long your business has been operating as an independent financial entity
• Outstanding debts: any debts that your company is still actively working to pay off
• Industry risk: the typical success rate and financial health of similar businesses in the same industry

Many more factors can have an impact in determining a business credit score, but these are arguably the most important.

How can my credit score affect me?

Good credit is ideal for businesses the same way it’s ideal for individual citizens. A higher business credit score gives you better opportunities when you apply for small business financing. This means qualifying for larger funding amounts and receiving better rates and terms.

Business Credit Scores Are Vitally Important For Your Business.

They can define your company’s financial reputation, so understanding and managing your business credit score is essential for success.

Often used as an indicator of a company’s “financial health,” business credit scores are most commonly used to help lenders decide if a company can take on additional financial obligations, and if it will likely pay those obligations on time.

Lenders review credit history to determine whether or not to fund a loan or line of credit, as well as the interest rates and repayment terms if a loan is extended. Consumers and businesses with good credit often qualify for loans with lower interest rates and better payment terms than those with poor credit.

How Is Your Business Credit Score Different from Your Personal Credit Score?

Just as your personal credit score reflects the likelihood that you’ll meet your payment obligations, your business credit score measures the creditworthiness of your business. The higher the score, the more likely you are to be approved when you seek business capital and loans.

Understanding the difference between business credit and personal credit is an important first step to boosting your business credit score. Here are four significant differences that you need to keep in mind.

1. Anyone can view your business credit.

Unlike personal credit where only you have the ability to view your own consumer credit report or provide it to another person to view it, anyone can view your business credit report.

That means a consumer could look at your business credit report, or another business could decide to view it. The fact that your business credit score is publicly available to rivals and potential partners should be enough motivation to keep it well maintained.

Of course, that also means you can view other businesses’ credit scores whenever you want. If you’re thinking about adding a vendor to your supply chain, you’ll probably want to know if that vendor is in good financial health so that they don’t lapse in providing you with the materials you need. Having access to other business credit reports is something you can, and should, take advantage of.

2. The scales are different.

Personal credit scores are not on the same scale as business credit scores. Personal credit is typically expressed in a range from 300 to 850. (Generally, 700-749 is considered “good” credit, and 750 and above is considered “excellent.”)

Business credit is generally on a scale of 1 to 100. The closer you are to 100, the lower risk you are, so you want to be as close to 100 as possible.

3. They have no impact on each other.

Your consumer credit score has no impact on your business credit score, and vice versa. If your business credit score goes up, it doesn’t mean that your consumer score will go up, and if your consumer score goes down, it doesn’t mean that your business score will go down. In reality, the two scores have no interaction with one another. That’s why it’s important to build both separately.

4. Late payments (and early payments) are weighted differently.

With personal credit, late payments generally don’t affect your credit report until you’re 30 days late, and early payments have no effect on your score whatsoever. By contrast, business credit takes “days beyond term” (DBT) into account: the date your invoice was due and the exact number of days that it’s past due.

That makes paying invoices as close as possible to the due date very important when you’re trying to build your business credit. The good news is, you can improve your business credit score by consistently making payments before the due date.

How to Improve Your Business Credit Score

1. Separate Personal and Business Credit

As with income and expenses, it’s important to keep business and personal credit separate. Businesses are rated from zero to 100 with a Paydex score, which is similar to a personal FICO score. Having a score above 75 is necessary to obtain the best interest rates and credit terms.

Be sure to incorporate your business to avoid having personal credit scores be used for business purposes. Once you have business and personal matters separated, it’s time to start building credit.

2. Apply for Credit

Once a business is up and running, apply for a business credit card and line of credit. Although credit limits might be small for growing companies, as you make purchases and pay off balances on time, your credit rating and limit will grow. Make sure creditors report transactions as business trades so your company’s credit can be established.

Remember that applying for credit doesn’t mean a green light for unnecessary spending. Only use credit cards for expenses you’ll be able to pay off monthly, and make sure payments on your line of credit aren’t more than you can afford. Increased interest or penalties for late payments will do more harm than good for your business – and your credit score.

3. Pay All Bills on Time

No matter how big or small a bill, make sure all payments are made on time. Late payments lower your credit rating and raise red flags with potential business associates. If it looks like you might not be able to make a payment by the due date, call the vendor and explain the situation. It might be possible to get an extension or make alternative payment arrangements.

4. Keep Your Debt-to-Credit Ratio Low

Just like with personal credit cards, you never want to max out business credit. Try to use only a small portion of your revolving credit limit. As your business grows, you may need to apply for a larger loan, and it’s important not to already be buried in debt when that time comes.

5. Check Your Business Score Report Often

Business credit reports can be obtained from Experian, Dun & Bradstreet and Equifax. Mistakes do happen, and business identities can be stolen. If you find an error or fraudulent transaction, dispute it. Correcting just one error can do wonders for your credit rating.

How Can a Small Business Loan from Credibly Help Build Your Company’s Business Credit Score?

Showing Payment Responsibility

Paying off financial obligations according to the agreed-upon terms is the first and most important step in establishing a good business credit score. If a business pays the Credibly loan on time, it can strengthen their business credit profile by showing that the business is managing its payment obligations responsibly — and thereby positioning itself as a better credit risk for future lenders.

Increase Trade Activity

When a small business lender like Credibly reports payment history to Experian, it can help build and improve a business credit profile by providing additional trade activity.

All business accounts — not just loans, but also recurring expenses like utilities and leases — should be established in the company’s name, and business owners should also ensure that their business vendors report their payment history to a business credit agency.

We recommend that small businesses regularly monitor their business credit score for risk changes, and proactively manage it to maintain the lowest risk potential. Small business owners can do so easily by visiting www.experian.com/businesscreditreport and subscribing to Experian’s Business Credit Advantage monitoring service. And when you’re ready to apply for working capital from Credibly, start here.

Frequently Asked Questions (FAQs) About Business Credit Scores

Who can view my business credit report?

Unlike personal credit, anyone can view your business credit report, including consumers, other businesses, and potential partners. That’s why it’s important to keep your business credit score well-maintained.

How often should I monitor my business credit score?

Small businesses should regularly monitor their business credit score for risk changes and proactively manage it to maintain the lowest risk potential. It’s recommended to check your business score report often, and subscribing to a business credit monitoring service can be helpful.

What is a Paydex score?

A Paydex score is a score from 0 to 100 that rates businesses based on their payment history. It is similar to a personal FICO score, and having a score above 75 is necessary to obtain the best interest rates and credit terms.