Most people are familiar with the concept of credit scores. Major credit bureaus track your interactions with credit and debt and then apply a formula to determine your score. That score indicates how trustworthy you are as a borrower.
Similar to individuals, large and small businesses also have credit scores. If you own a company, it’s essential to understand how small business credit works and what steps you need to take to have strong business credit.
What is a business credit score?
A business credit score is a score that lenders can use to get a quick sense of how trustworthy your company is as a borrower. The higher your business’s credit score is, the more likely you are to make your required bill payments, making you a safer borrower.
There are three primary business credit reporting agencies. Equifax and Experian offer business credit reports, while Dun & Bradstreet provides something similar called a PAYDEX score.
Typically, business credit scores range from a low of 0 to a high of 100. If you want your business to have access to the best loans and the lowest interest rates, you want your credit score to be as close to 100 as possible.
When determining business credit scores, lenders will look at a variety of factors, including:
- The age of your business. The older, the better.
- Recent applications for lines of credit or loans. Fewer is better.
- Recent use of business lines of credit. Having lower credit utilization by keeping balances reasonable and avoiding maxing out credit is better.
- Collections or tax liens in the last seven years. Fewer is better.
- Your company’s bill payment history. On-time and early payments are better than late ones.
How does business credit differ from personal credit?
Lenders use business credit and personal credit histories to evaluate your trustworthiness as a borrower. For most small business loans, especially if the business is newly established or doesn’t have a robust credit history, the owners’ personal credit is typically checked.
In both instances, the higher your score, the more confident a lender will feel about offering you a loan, but here’s how business and personal credit differ.
Usage of credit scores
The most obvious difference between business and personal credit is when each score gets used by lenders.
Personal Credit: Lenders will examine personal credit for personal loans like mortgages or car loans.
Business Credit: Lenders will check the company’s credit score for business-related credit needs such as lines of credit.
Identification numbers
Personal Credit: Linked to an individual’s Social Security Number (SSN).
Business Credit: Tied to Employer Identification Number (EIN) corresponding to the business name and legal entity.
Score range and calculation
Personal Credit: Scores range from 300 to 850.
Business Credit: Scores range from 0 to 100, influenced by factors like company age and industry odds.
The formulas used and the weight assigned to each factor are different between personal and business credit.
For example, the age of your company and the odds of failure in your industry may influence your business credit score. By contrast, age doesn’t play a role in your personal credit beyond the age of your accounts.
Factors impacting credit scores
Personal Credit: Age of accounts doesn’t impact the score beyond a certain point.
Business Credit: Influenced by company age and industry-related factors.
Keep in mind that many providers will also check your personal credit score if you apply for a business loan. This is especially true for solopreneurs and brand-new businesses that may not have a significant business credit history.
Reporting agencies
Personal Credit: Personal credit scores are reported by Transunion, Equifax, and Experian.
Business Credit: The main business credit bureaus are Equifax, Experian, and Dun & Bradstreet. Dun & Bradstreet are responsible for DUNS numbers, which are unique nine-digit numbers.
Why is business credit important?
If you’re an entrepreneur running a startup, sole proprietorship, limited liability company (LLC), or another type of business entity, strong business credit is essential for many reasons.
Your business credit profile is critical to qualify for business loans and make it much easier to find a lender to borrow money and grow your business.
A good business credit report can also help you secure better terms on a small business loan. Establishing and maintaining a higher business credit score can help secure a loan with more favorable financing options, like repayment terms or interest rates.
With a poor business credit file, you may be subject to the highest borrowing rates, which make the loan more costly for your business.
If you regularly work with other businesses to purchase supplies and raw materials, your credit can also affect your partnerships with those suppliers. Better credit may afford you better payment terms on payback periods. For example, a company that expects you to pay invoices within 30 days may be willing to stretch your payment timeline to 45 days with a high business credit score.
How can you build and maintain business credit?
In many ways, credit building for a business is very similar to building your personal credit score. It’s all about showing that you can use your credit accounts effectively and be trusted to make on-time payments each month.
Applying for a business credit card is one of the best ways to start building business credit. Many lenders and financial institutions that offer business bank accounts offer company credit cards. If you have good personal credit and at least a few months of operating history, you should be able to qualify.
Over time, using your credit card effectively and consistently making monthly bill payments can improve your credit rating and help you get a higher credit limit. Increasing your company’s revenue and managing your other bills effectively will also help you build credit.
Once you have a good credit score, you can leverage that credit to grow your business through business financing.
While planned and strategic spending is necessary to grow a business, it’s important not to overextend or max out lines of credit or business credit cards. Ensuring your cash flow allows you to make your monthly payments will help maintain and improve your credit score.
Bottom line
Regardless of your business structure, having a good business credit score lets lenders verify your company’s financial stability and ability to repay debts. If you’re a small business owner who takes the time to prove your creditworthiness, you can leverage your credit to qualify for lower-cost loans that will help you grow your company.
