Did you know your small business has a credit score, too? After 12 to 24 months in operation, your business will have been active enough to receive a business credit score. It will become a critical measurement that banks, landlords, and other money lenders will use to determine the creditworthiness of your business.
Your business’s credit score is a simplified overview of several financial factors. It can determine how much money your small business can borrow, which type of small business loan you’ll qualify for, the kind of lender that would consider your application, and the interest rate they’re prepared to give your business.
A business credit score is just like a personal credit score. Your business credit score is a number assigned by a credit bureau that measures your business’s creditworthiness based on your past financial data. It’s the compiled payment history of your business’s relationship with borrowed money compared to the records of every other business.
Anyone in financing may use it to determine how much and at what rate they’re willing to lend you money or extend credit and how likely your business is to repay that debt. If you’re applying for a business line of credit, the odds are high that your credit score will impact the terms you receive.
Unlike personal credit scores, which range between 300 and 850, your business credit score is charted on a scale from 1–100, with anything 75+ recognized as a strong business credit. Higher numbers indicate to lenders that the business pays its bills, payroll, and taxes on time and services its debt responsibly. A lower number could show missed payments, and lenders will conclude you’re not a low-risk borrower.
Business credit scores in the U.S. usually get generated by four business credit bureaus — Equifax, Experian, FICO, and Dun & Bradstreet. These companies have specific terms for their calculated business credit scores, like a FICO score from FICO and a PAYDEX score from Dun & Bradstreet.
Information gathered to produce your small business’s credit score comes from public records, other lenders, payment history, and current/former vendors. They also consider the personal credit scores of all owners to form this business credit report.
While the three credit score providers have different ways of crunching the data to assign scores to your credit profile (and none publicize the details of exactly how they do this), the general metrics used by all the credit bureaus include:
Credit lines a business applied for in the past nine months
Credit lines opened by a business in the past six months
Credit card repayment history over the past 12 months
Early and late payments on a business’s record (regardless of how late or early)
Business cash flow
UCC (Uniform Commercial Code) filings
Overall health of your industry
Lenders might also check your personal credit score when you apply for small business financing, particularly for newer businesses that don’t have an extensive credit history. In some situations, they’re the preferred credit score used by a lender.
What are the key differences between personal credit scores and business credit scores?
Personal credit scores look at the applicant’s personal finances.
Business credit scores consider the finances of the business and the business owners.
Personal credit scores range from 300 to 850, with a score above 700 considered “good” and above 800 considered “excellent.”
Business credit scores generally fall between 1 and 100, with 75 or higher being excellent.
For a 3rd-party to access your personal credit report, they’ll need written or expressed authorization from you.
Anyone through the issuing agency can access business credit scores and doesn’t require written authorization.
Every small business owner should check their business credit score every year to ensure you’re in the 75+ range, or if your business isn’t holding a score of 75 or more, find out why.
You can purchase your business credit report from any credit reporting agency, and you don’t have to stick to one credit reporting firm for the rest of your business’s life. The cost to access your business credit score depends on how much data needs to be included. This data capture is a one-time expense that arms the credit score provider you choose with everything they need to provide constant credit monitoring for a monthly subscription fee.
Anyone can check your business credit score if they pay the fee. Unlike personal credit scores, which require you to release the information to any entity wanting to check it, business credit scores are public records. Note that lenders aren’t the only entities that may look at your business credit score. Landlords, potential business partners, or even customers can inquire about it.
Lenders access your business credit score for the same reason they check your personal credit score when you buy a car or a home or apply for a business credit card — to determine credit worthiness of the applicant.
Is your small business trying to buy or lease a new bulldozer? Are you renting a new space or entering a financial agreement with a third party? In each of these cases, the financier wants to know how likely you are to pay back what’s due based on past payment history, and the business credit report is the best gauge they have.
Is it possible to change your small business’s credit score? Yes. Just like a personal credit score, you’ll use the same steps to build business credit.
Two quick steps to improve a business credit score are:
Pay down existing debts owed by the business quickly. Lowering debt attached to your bank account is a fast way to boost any credit rating, business or personal.
Limit the number of new debt applications or submitted loans you apply for. This is particularly important if you submit multiple applications within nine months. Working with a lending marketplace where you input a single application to reach 75+ different lenders can ensure you submit only one application but still access financing from multiple lending sources.
Increasing revenues and profits can also improve your company’s credit. Make a habit of keeping tabs on where you’re spending and what you’re earning through an accounting app connected to your credit card that can help you spot opportunities to earn and save more.
A good business credit score isn’t essential for business borrowing, and a less-than-perfect score isn’t the end of the world (or your business). Some financing options place a greater emphasis on the business owner’s personal credit score. Others may be more interested in your daily receipts or collateral to assess your financial health.
While it’s a good idea to pay attention to your business credit score and take steps to improve as needed, it’s not the only factor you should consider when securing financing to grow your business. You’ll need to provide lenders with basic information, like how much money or credit you need and why you want business funding.
Once you’ve accessed your score and all necessary information on your business’s financial standings, you can start applying for financing. For tips that’ll set you up for success to secure the funds you need, check out our article, “What Will You Need to Apply for Small Business Financing?, to get you through the application process.
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