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Business Credit Scores: The Essential Guide

A business owner checking their business credit score

As if protecting personal credit wasn’t stressful enough, business leaders have another credit score to worry about. It’s called your business credit score, and it has a significant effect on your capacity to grow. Without strong business credit, beneficial business partnerships and financial resources are much harder to obtain. Though business and personal credit have several commonalities, establishing and maintaining business credit requires its own set of tasks.

In this guide, we’ll answer the following common questions and more:

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    What Is Your Business Credit Score?

    Business credit is precisely what it sounds like: a credit score for your business. While personal credit reflects an individual’s credit activity, business credit only reflects credit activity tied to the company itself. This refers to partnerships and debt arrangements that are in the business’s name. Thus, vendors and financial institutions use business credit to assess your financial reliability. Strong business credit indicates that you can be trusted to repay debt and make timely payments.

    Who Are The 3 Main Business Credit Bureaus?

    The three main business credit bureaus include Experian, Equifax, and Dun & Bradstreet. Each has its criteria for rating business creditworthiness. So don’t be surprised to score differently at each credit bureau. And yes, Equifax and Experian do also offer personal credit reports. However, they’re separate from your business credit accounts.

    Your business credit report includes similar information to your personal credit report but based on your business activities. And although your personal credit can impact your business credit, especially when you first launch a business, they aren’t the same account.

    Your business credit report includes details such as:

    • Business background (owners, parent companies, subsidiaries, etc.)
    • Company financial information
    • Credit score and risk factors
    • Histories for banking, trade, and collections
    • Public records such as liens, judgments, bankruptcies
    • Uniform commercial code filings (creditor filings of security interests in personal property)

    Also, Dun & Bradstreet gets information from the Small Business Financial Exchange to include in your business credit report.

    How Is Your Business Credit Score Calculated?

    Business credit is calculated by the three major credit bureaus: Dun & Bradstreet, Experian, and Equifax. Each has its criteria for business creditworthiness. So, you may score differently at each bureau. However, the most relevant of the three scores is a number between 0 and 100, calculated by Dun & Bradstreet. And as long as you follow the universal guidelines for business credit, you won’t have drastic differences in your score for each bureau.

    Here are the primary criteria for business credit score:

    • Credit utilization ratio
    • Payment history
    • Length of credit history
    • Public records, i.e., bankruptcies, liens, and judgments
    • Company size
    • Risk factors in your industry

    Why Is Business Credit Important?

    Strong business credit presents several vital benefits. Arguably the most important is its impact on access to advantageous business loans and other forms of credit. In addition to your personal credit score, many financial institutions review your business credit before approving business loan applications.

    The second most important benefit pertains to vendors or suppliers. These companies may review your business credit not only to determine if they should work with you but also if they should extend favorable terms.

    How Does Good Business Credit Impact Your Bottom Line?

    Despite this wide variety of benefits, virtually all of them share at least one long-term result: impacting your business’s bottom line, albeit indirectly. Here are five ways good business credit opens you up to new opportunities to make more money for lower costs:

    1. Take Advantage of Lower Interest Rates

    Anyone who has explored business loans knows that the most affordable products are reserved for borrowers with the highest personal credit scores. Depending on your industry, your business credit could be just as integral to your interest rate as the benefits mentioned above. And like personal credit, even the most marginal differences in points (i.e., two or three percentage points) could significantly raise or lower your interest.

    SBA Loans are widely viewed as the most advantageous loans on the market. Hence, these products carry a very rigorous pre-screening process. Potential borrowers are assessed with a number that combines their personal and business credit scores: the FICO Small Business Scoring Service (FSBSS). To qualify for the SBA’s most popular loan – the 7(a) loan, businesses must score at least 140 out of 300 possible points.

    Strong business credit can also affect numerous other aspects of your loan, like your borrowing amount and terms. Poor business credit, on the other hand, strictly limits your options for additional funding. Think of how difficult it is to access affordable financing with poor personal credit. The addition of poor business credit only makes your list of viable options even smaller. This is partially because, unlike personal credit, there’s no one to blame for business credit issues but yourself. In other words, poor business credit typically doesn’t stem from uncontrollable circumstances. It’s just the result of poor decision making on behalf of the business leader.

    2. Develop Stronger Partnerships with Vendors or Suppliers

    Business credit has a direct impact on trade credit. This is the “buy now, pay later” repayment system used by vendors and suppliers. Your business credit determines the amount of time these companies give you to pay for your order. Lower business credit means shorter payment terms and vice versa. A business with poor business credit might not even be able to access trade credit at all. They would have to pay their bill less than a month after placing the order. A business with strong business credit, on the other hand, might be given 60 or 90 days to pay their bill. Longer payment terms are especially advantageous for cash flow if they exceed those of credit cards or lines of credit.

    Additionally, strong business credit could grant you access to other vendor-related benefits like discounts, promotions, and closeout prices. Simply put, businesses with strong credit are treated as a top priority. They are given more rewards because the vendor has reason to believe they will continue doing business with them for a very long time.

    3. Access the Best Financing Options

    There are many financing options out there, but that doesn’t mean lending is a one-size-fits-all deal. Some business lenders may have strikingly low rates but hefty origination fees. Others may have lending packages designed to meet one type of business’s unique needs but not another. Unfortunately, business lenders aren’t required to advertise their products’ APR. If this wasn’t the case, you could easily compare costs in an “apples to apples” sort of way.

    When you choose a lender, credit card, etc., you’re not just choosing an interest rate. You’re also selecting applicable fees, penalties, rewards, benefits, and more. Poor business credit limits your choices when it comes to business lenders and their products. And while more choices may make decisions more challenging, they will also allow you to pick the best and most affordable path for your business.

    4. Avoid funding shortfalls 

    Just because you’re approved for a small business loan or line of credit doesn’t mean that your financial needs are met. Poor business credit can limit loan amounts, which means you’ll be forced to seek additional sources of funding to cover the gap. If you can’t come up with the missing funds, you may need to forgo a purchase that would otherwise lead to a healthier bottom line. This could include new, more efficient equipment or low-cost inventory.

    Strong business credit can increase the chances that you’ll be approved for the funds you need when you need them.

    5. Grow your client portfolio

    Many entrepreneurs are surprised to find that business credit can impact your efforts to forge new client relationships. This is particularly true for larger companies. Many will check your business credit to make sure you meet their minimum qualifications. For example, some big-box retailers use the Dun & Bradstreet PAYDEX score to screen companies who want shelf space in their stores.

    Even if you are pulling in revenue and otherwise operating successfully, poor business credit can stop you from engaging in lucrative partnerships.

    How To Improve Your Business Credit Score:

    Earlier, we noted that one of the critical criteria for business credit is the length of credit history. For this reason, anyone looking to building business credit should start as soon as possible. Luckily, the essential steps for building business credit are the same steps required for starting a new business. In short, building business credit revolves around two practices: separating your personal and business finances and paying your bills on time.

    1. Register as an Independent Company

    You don’t need to be registered as a limited liability company (LLC) or corporation to have a business credit profile. This can be done by establishing your business as a sole proprietorship or general partnership as well. But becoming an LLC or corporation makes it much easier to build business credit and protect your personal credit score from severe damage.

    When you register as an independent company, your business’s debts are no longer tied to your personal credit score. This allows your business to take on significantly more debt without causing your personal credit to plummet. If you were suddenly unable to pay your bills, it would be your business credit – not your credit – that would take the hit. With your personal credit still in good shape, you would have no trouble accessing a business loan to cover the expenses.

    2. Open a Business Bank Account

    If you register as an independent company, you’ll have to open a business bank account. But even if you’re a sole proprietor, you should still open a business bank account to separate your business and personal finances. This is crucial for building business credit.

    3. Apply for a Business Credit Card

    If you weren’t already offered a business credit card when you opened your business bank account, apply for one now. This will be your primary tool for covering business expenses in your business’s name.

    4. Get a Business Address and Phone Number

    This essential step further establishes your business as a separate entity from your personal finances.

    5. Create a Business Credit Profile

    We’ve established that paying vendors and suppliers on time is critical for building business credit. Well, without a business credit profile, these companies have nowhere to report your timely payments. To clarify, a business credit profile allows your trade accounts with vendors or suppliers to be tracked by credit bureaus.

    Creating a business credit profile is very easy if you have an employer identification number (EIN). You’ll get one of these when you register as an independent company. After that, all you have to do is create a profile with one of the credit bureaus. Of the three credit bureaus, Dun & and Bradstreet is reportedly best for tracking vendor and supplier accounts. The bureau tracks your payments through a nine-digit DUNS number, which you can apply for here.

    6. Pay Your Vendors or Suppliers Before the Due Date

    Paying your vendor before the actual due date is arguably the fastest way to build business credit. On the contrary, paying late is the quickest way to lower your business credit score. Paying before the due date is also a surefire way to earn the benefits mentioned above (i.e., discounts, promotions, etc.).

    7. Pay Expenses with a Business Credit Card

    Paying bills on time will do nothing for your business credit if you pay them through a personal account. They must be paid from an account registered in your business’s name, i.e., a business credit card. Compared to personal credit cards, business credit cards have much higher credit limits. Cardholders are expected to carry high balances. Putting this much debt onto a personal credit card would ruin your credit score.

    Thankfully, many credit card providers have considerably loosened their requirements for business credit cards. It is now much easier for younger businesses to obtain business credit cards and begin building business credit.

    8. Make Sure Vendors and Suppliers Report Your Payment History

    You would think that any reputable vendor or supplier would report your payments to the three credit bureaus. Only sketchy companies wouldn’t report your payments, right? Unfortunately, this is not the case. Before partnering up with a vendor, you must first make sure that the vendor will report to all three bureaus.

    Sometimes, a potential vendor will not report to the bureaus unless a new business partner urges them to do so. If the vendor does not report, your timely payments will not affect your business credit profile. In this case, you would only be able to negotiate better terms with that vendor and no one else. Only that vendor would be aware of your payment history.

    Vendors that report to the three bureaus may be more likely to offer rewards for timely payments, like longer terms. Credit bureaus like to see this, as it denotes high financial reliability.

    9. Look into Different Types of Credit

    Another ingredient for strong business credit is a mix of credit lines or debt. This could include a business credit card, trade credit with suppliers, and a business line of credit. In the case of the third option, you must make sure the financial institution reports your payments to the three bureaus. Once again, you’d think that any reputable institution would report payments, but many do not. Some only report payments for specific products.

    Also, you should only consider a line of credit if you’ll be able to pay off your balance in a reasonably short time frame. Much like your personal credit score, your business credit score depends on how much credit you have available. It’s perfectly fine to borrow funds occasionally, but only if you pay most (if not all) of it back relatively quickly. For this reason, you should not carry high balances on business credit cards and lines of credit.

    Even if business credit did not exist, a business line of credit is only advantageous if you can pay off the balance shortly after drawing from the credit line. A common purpose for a business line of credit is ordering extra inventory during an unexpected spike in demand for a specific item. You could quickly pay off the debt with the revenue from the additional sales.

    Lastly, it’s best to apply for a business line of credit well before you need the money. The state of your cash flow when you apply determines the size of your credit line. Higher credit limits + lower balances = strong business credit.

    10. Pay Taxes on Time

    A fundamental tenet of strong business credit is not owing too much money to anyone. This includes business taxes. If you don’t pay your taxes on time or pay too little, your business credit could suffer. Hence, it’s highly recommended to set up a schedule for paying taxes monthly or quarterly. Numerous software tools can do this for you, along with filing the payments and estimating what you’ll owe come tax season.

    As you can see, the rules for building and maintaining credit are pretty straightforward. Still, you may find yourself in a predicament with two choices, and you’re not sure which one would help your business credit.

    Below, we’ll go over a few FAQs for business credit.

    Should You Close Old Business Credit Accounts?

    When reviewing your business credit profile, you might find old credit cards or lines of credit that you no longer use. Contrary to popular belief, closing old accounts will not improve your business credit score. It’s more likely to have the opposite effect. Remember, one of the requirements for strong business credit is long credit history. Closing accounts essentially shortens your credit history and makes your business seem younger.

    In summary, old unused accounts look better to credit bureaus than no accounts.

    Should You Have Past Issues Removed from Your Business Credit Profile?

    Let’s say you were previously forced to default on a business loan. The debt was eventually resolved, but it’s still on your business credit profile and inhibiting your score. At first, having the default removed seems like the most logical solution. But even if this is a possibility, removal could have the same effect mentioned in the last section: shortening your credit history.

    However, there is another solution to this issue that can improve your business credit score. It’s the same course of action recommended for business leaders with similar problems on their personal credit report. What credit bureaus like to see in this situation is another credit line or business loan. Just a few months’ worth of timely payments could offset the damage inflicted by the previous misfortune. Vendors and financial institutions tend to harbor the same opinion of removals. They are more likely to work with someone who is actively rebuilding business credit than someone with shorter credit history and no open credit accounts.

    Does Checking Business Credit Lower Your Score?

    This is not entirely true. As a business leader, you can check your business credit report at any time without lowering your business credit score. Your score may be affected, however, when financial institutions or vendors request a business credit report. This is another reason why businesses shouldn’t open too many credit accounts. For instance, your score might plummet if you apply for a business loan and business credit card right after signing a deal with a new vendor. Opening multiple accounts in a short time frame makes you seem reckless or on the verge of bankruptcy.

    How Often Should You Check Your Business Credit Score?

    A few months’ worth of payments to a vendor or credit card provider will generate a business credit score. Once you have confirmed that your score exists, you should plan on checking it at least once a year. Much like a personal credit report, mistakes happen with business credit profiles all the time.

    What Should You Do if You Have Poor Business Credit?

    If your business has bad credit, step one is ordering credit reports from each of the three bureaus. Before pursuing any other solutions, you must first check for errors or missing information. If you spot an error, contact the financial institution or vendor about having it fixed.

    From there, you can rebuild your business credit by following the steps featured in this guide. Financial institutions will be more likely to approve loans if you tell them you are actively working on rebuilding your business credit.

    Once you’ve established several months’ worth of timely payments, check your score. If you see an improvement, reach out to your institution. They may be able to reduce your interest rate. If not, consider applying to a new institution for a cheaper loan. Remember, it’s okay to be repaying a loan when you have poor business credit. This won’t scare off institutions. And it’s not at all uncommon to use one loan to repay another.

    Business Credit: A Major Step in Your Career

    Building a business credit profile is a monumental step in your career. It shows that you’ve officially separated your personal finances from your business finances. You now have the means to manage significantly more significant amounts of credit and debt. The better you are at improving business credit, the better you’ll get at improving other vital numbers related to your business’s reputation. You have to keep following the right guidelines, no matter how hectic your work life might be.

    Which strategies have you used to improve your business credit score? Share any suggestions or resources on our contact page!

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