Financing is essential for the success of any business. From small startups to large corporations, businesses rely on loans to support and grow their business. But with every loan comes the risk of default. Lenders exercise discretion and are very careful about the companies they choose to extend credit to. Without an adequate business credit rating, companies may find it difficult to obtain the necessary loans.
What is a business credit score?
A business credit score is a credit rating that indicates the likelihood that a business will repay its loan on time and not default. Lenders rely heavily on business credit scores to determine loan eligibility and interest rates. Business credit scores use a different score than personal credit scores, with scores ranging from 1 to 100. The higher the score, the more creditworthy the business is considered to be. To get a small business loan, your business needs a score of around 75, according to the US Small Business Administration. Credit quality can also affect a business’s ability to enter into a brokerage or purchase items on credit from retailers.
There are three major credit reporting agencies in the United States: Dun & Bradstreet, Equifax, and Experian.
What affects a company’s credit score?
Many factors are used to determine the credit rating of a business.
- Credit report. Business credit reporting agencies look to see how old a business is when determining its score. Older companies have a longer history of higher financial stability than newer companies.
- Payment history. If a business is late or late in making payments, it will lower its credit rating. Even one time payment can have a big impact.
- Use of debt. Credit utilization is the ratio of credit used by a business to credit available to the business. Creating a sustainable financial system and taking on as little debt as possible can help improve your score.
- Public records. Past delinquencies, collection status, debt and other factors that indicate difficulty paying can affect your credit score.
- Crowd information. The credit bureau will also judge the financial health of the business based on its risk, location and size.
- Business failure score. Here’s how your business is at risk over the next 12 months. Credit bureaus take this into account when calculating credit scores.
Business credit score vs personal credit score
Business credit scores and personal credit scores share many characteristics. However, they have different functions and therefore have major differences.
- How they look. A business credit score and a personal credit score are used to identify a borrower to lenders.
- How different they are. A business credit score evaluates the business value of a company, while a personal credit score evaluates the ability of individuals.
- How they look. In both scoring systems, the higher the score, the better the borrower is considered.
- How different they are. Unlike a personal credit score, a business credit score uses a 1-100 scale, while a personal credit score uses a 300-850 system.
- How different they are. If a person sees information they believe is incorrect on their personal credit report, they can dispute the information and the credit bureau will respond legally. However, if a business raises a dispute with a false charge, the credit bureau is not legally required to respond. When credit bureaus respond, they may be less thorough and knowledgeable than personal credit repair responses.
For a long time
- How different they are. A personal credit account stays with a person for life. A business credit account can change ownership if a business is bought or sold, or close if a business closes.
Access to credit
- How different they are. In general, businesses tend to have more credit than individuals.
How to improve your business credit score
- Improve your personal credit score
For all businesses except corporations, the credit rating of the owner affects the credit rating of the company. The degree of impact varies depending on the type of business process. Business credit for sole proprietors will be entirely dependent on their personal credit score, as they have personal responsibility for the business. In contrast, the effect of the creditworthiness of owners on LLCs is less specific. Either way, it’s important to make sure your personal finances are in order, especially for new small business owners. Due to the lack of long-term data on the credit of new businesses, credit bureaus can rely on the personal credit reports of the company’s owners.
- Sign up for a business credit card and a net 30 account
Some of the easiest ways to prove yourself to lenders are business credit cards and 30 accounts. Business credit cards are available to new businesses from major financial institutions such as banks and credit card companies. Paying off your business with a credit card and making sure you pay your bills on time or at the beginning of each month shows the credit bureaus that your business is profitable. In addition, business owners can also sign up for a Net 30 account, which allows them to purchase the products and services needed for their business directly from a merchant using credit. Store owners are responsible for paying vendors within 30 days of their purchase. Regular use of net-30 accounts and timely payments can help you build your business credit.
- Reduce the use of credit
Credit utilization is the ratio of the amount a business borrows to the amount it is allowed to borrow. The lower the ratio, the better the credit rating of the company. You can reduce your credit utilization by opening additional lines of credit and borrowing as little as possible. Paying small amounts throughout the month on a business credit card, rather than paying all at once at the end of the month, can also improve your credit score.
- Pay all your bills on time
The most important part of a company’s credit rating is the stability and timeliness of its payments to creditors. It’s more than just a credit card with 30 payments. To get a good credit score, a business must pay its rent, utilities and other expenses on time. One-time payments can damage a company’s brand. As long as your business pays its debts on time, its credit rating and ability to borrow will improve over the years.