Most people are familiar with personal credit scores, but do you know how your business credit score can impact the strength of your business?
Many small business owners depend on business loans to grow their companies. For these loans, one of the first things a lender will look at is your business credit score. A good business credit score could make it easier to obtain funding, as well as lower the interest rate you receive on these loans.
But what is a good business credit score? In this article, we’ll help you understand the things that can impact your business credit score and illustrate the importance of monitoring your score for any irregularities.
What Factors Make You Have a Good Business Credit Score?
When it comes to business credit scores, the higher they are, the better. But what are some of the factors that can impact your credit history?
Business credit bureaus will typically calculate your score based on the following factors:
- Longevity: The longer you stay in business, the higher your score will be
- Revenues: High profits = high scores
- Assets: The property you own can raise your score
- Outstanding Debts: Paying bills on time raises your score
- Public Records: UCC filings or other judgments can lower your score
- Industry Risk: Bars and restaurants tend to be riskier than other businesses, for example
- Credit Limit: Exceeding 25% of your credit limit can lower your score
Like your personal credit history, debt management can have a major impact on your business credit score. This doesn’t mean that all debt is bad. In fact, some business owners have been able to raise their credit score by deliberately taking on more debt, and paying it back on time.
A manageable amount of debt can demonstrate financial responsibility, which can improve your overall score.
Credit bureaus generally prefer that businesses stay within 25% of their credit limit. If this seems restrictive, consider opening multiple credit cards. This can help you spread out your expenses and keep you within tolerable limits on your lines of credit.
Keep in mind that it generally takes one to two years before your business will generate a reliable credit score from one of the major business credit bureaus. During this time, it’s important to hit the ground running and establish strong credit early, which will put you in a better position to obtain assets to support your growing business.
How Are Business Credit Scores Used?
Small business owners often rely on small business loans as their company grows. These assets might be needed to fund day-to-day needs, though many entrepreneurs use these loans to grow their company or purchase property such as retail space.
This is where your business credit score comes into play. Before approving your loan, your lender will want to know whether your business can pay back the funds you receive. Your business credit score will communicate your company’s overall “creditworthiness” and will influence the size of your loan.
A high business credit score will grant you access to the loans you need at a reasonable interest rate.
Conversely, a low credit score can send a red flag that your business is a risky investment, and you may find that your options are significantly limited.
This is why it’s vital to establish a good business credit score as early as possible. That way, you’ll have access to funding when you’re ready for your business to grow.
Think of the advantages of a high business credit score:
- Greater certainty of business loan eligibility
- Lower interest rates on your loans
- Business insurance rates may be lower
Typically, a business lender will look at the scores from each of the three major business credit bureaus: Equifax, Experian, and Dun & Bradstreet. It’s actually quite common for lenders to look at credit reports from all three agencies, and in some cases, your personal credit history may even come into play.
What Is a Good Credit Score?
While personal credit scores (such as your FICO score) range from 350 to 850, business credit scores range from 0 to 100. The higher your score is, the healthier your business is likely to be.
As a general rule, your credit score should be above 75, while a “good” credit score is anything over 80.
Experian, for example, breaks down business credit scores as follows:
- 0-15: High risk
- 16-30: Medium to high risk
- 31-80: Good credit
- 81-100: Excellent credit
Businesses with a credit score over 80 can expect their loans to be approved at essentially any institution. Businesses with scores below 80 can still receive business loans, but they may be limited in size and may be subject to a higher loan interest rate.
If your business falls at the bottom end of the scale, you’ll want to work on rebuilding credit before taking on additional loans. Paying off your existing debts and paying your bills on time can go a long way toward reversing damage done to your credit history.
Check Your Business Credit Score
How do you know your business credit score? The easiest and most reliable way is to obtain reports from the major business credit bureaus:
Be advised, however, that you will have to pay to receive your full credit report. There are some reliable free services, including Dun & Bradstreet’s Credit Signal and Nav Business credit reports, though the reports these services provide are incomplete.
Steer clear of “free” offers found online. Quite often these are scams designed to harvest your business data, creating a greater headache than most business owners are prepared to deal with.
How often should you check your business credit score? Business owners should check their business credit score several times a year or at least once per quarter. Don’t assume that just because your last credit report was positive that your company’s financial reputation is secure.
Monitoring your credit score is a relatively minor cost that can pay great dividends by granting you access to loans and financial services when you need them.
Businesses that anticipate the need for a business loan may want to pay particular attention to their score in the months leading up to their loan application, which can help them understand the loans and interest rates that they can expect.
Why It’s Important to Check and Dispute Errors on Your Business Credit Reports
What should you do if you find an error on your credit report? You might want to start by comparing your credit report across the three major credit bureaus. For example, if your Experian score is significantly lower than your Equifax or D&B score, it’s likely that you’re dealing with an error.
In this case, your best move is to contact the credit bureau directly. In some cases, the error is simply a matter of data getting mixed up between businesses and the problem can be straightened out relatively quickly.
In other cases, you may need to provide documentation to verify that your bills have been paid in a timely fashion.
Don’t wait! These errors aren’t going away, and even after they’re fixed, it can take several weeks (or even months) for them to completely disappear from your credit history. Addressing these errors immediately can ensure you’re ready to apply for a loan at any time.
Another reason to address these errors is the fact that your business credit score is a matter of public record. Unlike your personal credit score, anyone willing to pay for a report has access to your business credit score. This might impact partnerships with other businesses or vendors, which means that it is important to manage your financial reputation.
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