WHAT YOU NEED TO KNOW ABOUT BUSINESS CREDIT SCORES
Just as a FICO score measures your personal creditworthiness, your business credit score is a numeric representation of your company’s creditworthiness. The information on your business credit report is used to produce the score, and business funders use it when they’re considering your credit application to predict how likely you are to pay them back in a timely fashion. A higher score means your business has a history of paying bills on time.
It’s necessary to establish separate credit for your business. A good business credit score can help your business grow, see below the benefits of improving your business credit score:
Rates on insurance policies could be lower: As your business grows, insuring it could get expensive. A high business credit score may help keep rates lower.
Business and personal finances are separated: Creating a credit profile for your business adds a layer of separation between your business and your personal finances. Keeping your finances separate makes it easier to track business expenses for tax purposes.
Borrowing power increases: Strong business credit can help you get larger amounts of financing.
How is a business credit score calculated?
Each of the three major business credit bureaus, Dun & Bradstreet, Equifax and Experian, has its own method of determining your company’s creditworthiness. There are several other business credit reporting agencies, but for the sake of this article, we’ll focus on the big ones.
When ordering a business credit report, remember these two things:
- Each bureau collects and verifies information differently. Bureaus typically collect payment information from sources such as vendors, banks, data-gathering trade associations and business credit card issuers. This information generally is verified through third parties.
- Sometimes the data are incorrect. While all of the business credit bureaus claim to carefully vet their information, you still may find mistakes on your company’s report. Generally, you can correct these errors by contacting the bureaus and providing evidence that the information is inaccurate.
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Dun & Bradstreet measures a company’s risk using a Paydex score, ranging from zero to 100. This number is based on payment data reported either to the bureau or to data-gathering companies that partner with the bureau. It, along with a “commercial credit score” and a “financial stress score,” helps funders decide whether to extend credit to you and how much. Insurance companies also can use the score to set your premiums, and it can help landlords determine whether to take you on as a business tenant, according to Dun & Bradstreet. To calculate your business credit score, D&B looks at one specific factor: how timely you are when paying vendors like business funding funders, suppliers of raw materials, utility companies, insurance companies, leasing companies, and more. For this reason, paying your debts early, or encouraging your vendors to report a good history of payment can be extremely helpful in raising your credit score.
This being said, you can break down the D&B Paydex score into three tiers: scores between 80-100, scores between 50-79, and scores 49 and below. The highest range indicates a low risk of payments, with a score close to 100 meaning payments often come promptly or sooner than 30 days within terms. On the other hand, a score of 1-19 indicates that the business often takes more than 120 days to make payments.
Experian calculates your business credit score a bit differently than D&B does. This credit bureau collects information on your credit obligation from funders and suppliers, any legal filings for your business, and background information about your business. Then, an algorithm determines your business risk based on credit, public records, and demographic information.
Ranging from zero to 100, Experian business credit scores are different from Dun & Bradstreet’s Paydex score and Equifax’s payment index because they take into account multiple factors, not just payment histories.
Experian calculates your business credit score by collecting credit information from your suppliers and funders, legal filings from local, county and state courts, and company background information from independent sources such as public records and collection agencies.
Equifax uses its own method for calculating your business credit score as well, although Experian and Equifax use similar methods. Equifax collects information about your business— like payment history, credit data, and more—and then evaluates all of this data. In their evaluation, Equifax looks at the payment trends, the business credit history, the public record, and the demographics. Unlike D&B and Experian, however, an Equifax business credit report will give you three scores—a payment index score, a credit risk score, and a failure risk score.
The “business credit risk score” looks at the likelihood of your business becoming severely delinquent on payments. Scores range from 101 to 992, measuring these things:
- Company size
- Available credit limit on revolving credit accounts, such as credit cards
- Length of time since oldest financial account opened
- Evidence of nonfinancial transactions, such as invoices from a vendor, being delinquent or charged off for two or more billing cycles
The “business failure score” measures the likelihood of your business closing within a 12-month period. It ranges from 1,000 to 1,610, with a lower score indicating a higher probability of business failure. It assesses these things:
- The age of your oldest financial account
- How much of your credit limits you’ve been using over the past three months
- Whether you’ve had any delinquent accounts or late payments in the prior 24 months
- Evidence of nonfinancial transactions, such as supplier invoices, being delinquent or charged off for two or more billing cycles
For both the credit risk score and the business failure score, a rating of zero indicates bankruptcy.
5 Factors That Impact Your Business Credit Score
Despite the lack of consistency between the various business credit reporting agencies, you can generally expect that regardless of the agency involved, your business credit score will be impacted, at least to some extent, by these five factors:
1. Time in Business
When your business is brand-new, your business credit score will be lower simply due to a lackof credit. This will matter less after your business reaches two years of operations, which is when banks become more willing to fund business funding.
2. Payment History
Your consistency in paying bills on time, every time, is the single most important factor that will impact your business credit score. Even a single late payment can weigh heavily on your future access to capital, so you’ll want to be sure to set up a system to maintain payments from the beginning of your business.
3. “Credit Mix”
As we briefly mentioned, you can build credit in a variety of ways, such as using a business credit card, taking out funding, or establishing trade lines. This being said, future funders want to know that you can appropriately manage your finances in any borrowing situation. Therefore, your “credit mix” will influence your business credit score—by taking out multiple forms of credit and managing them appropriately, you’ll be able to maximize your credit score in this category.
4. Credit Utilization Ratio
Reporting agencies want to see that you’re using the business credit you have responsibly, which means making payments regularly and not over-relying on the credit you’ve been extended. In evaluating your business credit score, then, credit bureaus will calculate your credit utilization ratio—for best results, you’ll want to keep your credit utilization at around 25% of the total amount you’ve been extended.
5. Mistakes on Your Business Credit Report
Unfortunately, the business credit reporting process is not perfect and errors in reporting happen more often than you might think. This being said, debt or credit defaulting can be misattributed to your business credit report, which will severely lower your business credit score. To avoid these issues, you’ll want to monitor your credit reports regularly and request corrections promptly and in writing for any mistakes you might find.
How to improve your Business credit score.
1. Separate Business and Personal Finances
Not only is separating your business and personal finances important for building business credit, but it’s also generally a best practice for running your business.
Once you’ve set up your business checking account, you can apply for a business credit card that reports to business credit bureaus. By making on-time (or even early) payments regularly to vendors that report to business credit bureaus, you can start to build and maintain a good business credit score.
2. Ask Suppliers to Report Your Payment History
In order for the trade credit relationships you establish to count toward increasing your credit score, you’ll want to make sure that your payment history gets passed along to business credit reporting agencies.
3. Use a Business Credit Card for Day-to-Day Expenses
For the best possible impact on your business credit score, you’ll want to treat your credit card spending as if it were cash. You don’t want to spend money you don’t have and you will want to pay off your business credit card bill in full each and every month.
4. Set Up an Accounts Payable System to Avoid Late Payments
Even a single late payment can have a dramatic impact on your future ability to obtain capital for your business, which is why you need a reliable accounts payable system to help you keep track of the payments you owe to vendors, funders, and anyone with whom your business has a trade relationship.
5. Sign up for Business Credit Monitoring Services
An alternative to paying for your credit score once every year is to have your credit regularly monitored by the companies mentioned above.
You can register for your business’s DUNS number through Dun & Bradstreet’s online application portal. It only takes a few minutes to provide your company’s legal name and address, your contact information, and a few other basic pieces of information. From there, it should take about a month to receive your DUNS number via email or postal mail.
7. Allow Time to Build Your Business Credit
Building up your business credit score can feel like a mountain of effort that seems to never pay off—but you’ll want to be patient and stay the course. It will take time for your efforts to better manage your business credit to impact your credit reports and score, but ultimately it will make a difference.
8. Don’t Forget About Your Personal Credit
Although your personal credit score and business credit score are separate, your personal credit score will also play a role in your ability to receive credit products like small business funding.
Since your business credit score is an incredibly influential factor in your ability to get a lease, insurance, or small business funding, it’s worth investing time and conscious effort into establishing your business credit.