Last Updated September 12, 2024
A good credit score plays a significant role in determining business owners’ eligibility for financing. So if you’re a new business owner and you’re getting ready to start exploring funding options, it’s imperative to first know your credit score.
Once you begin monitoring your credit, you can start making strategies to increase your credit rate, like paying bills on time and removing any wrong information from your credit report.
This guide will provide a full breakdown of business credit scores, answering the following questions:
- How do you find your credit score?
- Who reports business credit scores?
- How does business credit differ from personal credit?
- What’s considered a “good” credit score?
- What factors affect your business credit score?
Finally, we’ll provide some tips regarding how to improve your score.
What Is a Business Credit Score?
A business credit score is a scoring model that predicts the creditworthiness of a business. Unlike personal scores, which typically range from 300 to 850, business credit scores range from 0 to 100. Lenders use the score to determine the likelihood of a borrower paying back the money.
The higher the score equals the higher “creditworthiness” of a business owner. Therefore, borrowers with a high credit score are attractive to lenders and get their loans approved quickly.
Business Credit Scores vs. Personal Credit Scores
To help clear up the differences between business credit and personal credit, take a look at the following five factors:
Credit bureaus: Experian, Equifax, and Dun & Bradstreet are the three major commercial credit bureaus that report business credit scores. For personal scores, the three major rating agencies are Experian, Equifax, and TransUnion.
Rating range: The scoring for individuals is from 300 to 850, while the score for businesses is from 0 to 100.
Standardization: FICO or Vantage Score is mainly used for decision-making when lending to consumers. However, when making business lending decisions, the lenders develop their own lending formula or use Dun & Bradstreet.
Access: It is easy for consumers to access their credit score information from different sources for free. However, businesses must pay a fee to get their credit score information, usually around $40.
Data: Business lenders check your business credit score before lending. Lenders don’t care nearly as much about your personal credit when making funding decisions, only considering such on rare occasions. Your personal credit shouldn’t affect your chances of qualifying for business loans.
How to Check Your Business Credit Score
Use one of the three major commercial credit bureaus, Dun & Bradstreet, Equifax, and Experian, to find your credit score.
Equifax does not directly provide credit scores to business owners.
You will likely find some websites offering free business credit score reports when you search online. However, you need to be careful because most of them might just want your money and provide inaccurate information.
Sometimes, lenders will actually find your credit score for you, for free.
For example, an invoice factoring company such as altLINE will run a background check on your business, which includes looking into your creditworthiness. Note that factoring is an alternative lending option, which you can actually qualify for even with poor credit. Regardless, this is simply another way your score can be revealed.
What Is Considered a Good Business Credit Score?
While ranges vary slightly depending on the respective credit bureau, borrowers are usually classified, based on their credit scores, into the following three groups:
- 80-100 = low risk borrower
- 50-79 = moderate risk borrower
- 0 to 49 = high risk borrower
You can guess what this means – if you have a score above 79, you likely won’t see much pushback from banks when enquiring about borrowing funds. If you have a poor score, it will be tough for lenders to be convinced that you can be trusted.
Why Is Establishing Good Credit Important for Your Business?
Maintaining a good credit score has the following benefits:
Higher Approval Rates
A good credit score will make it easy for your business to get financing from different lenders. With a good credit score, you can choose the type of lender you want for financing. Plus, you will have a wide selection of lenders to select from and get the opportunity to choose the best.
Competitive Interest Rates
You will have access to competitive interest rates with a good credit score. Lenders are willing to offer low-interest rates for businesses with high credit scores. In addition, you have the freedom to choose low-interest rates from multiple lenders.
Friendly Terms
Businesses with good credit scores get better treatment from lenders. In addition, they are likely to receive friendly terms because they are not risky.
For instance, a business with a score of 91 would get a longer repayment period than a business with a score of 65. A bank might also require the business owner with the lower score to put up collateral for a loan to make up for the risk they’re taking on.
All of this can make a big difference for business owners stressed about cash flow.
Good Business Reputation
A business with a good credit score is a reputable business. A good reputation is essential when doing business with other companies or finally deciding to sell the business.
What Factors Affect Your Business Credit Score?
Here’s what can affect your business credit score:
1. Business Profile
The number of years you have been in business can affect your credit score. Your business needs to register for credit as early as possible. Other things that they check include your business line and the size of your business.
2. Payment History
A payment history shows previous payments by the business and whether they are promptly made. Prompt payment by the business increases the credit score.
3. Collections and Tax Aliens
To calculate the business credit score, they will check collections and tax aliens by the business for the last seven years.
4. Business Credit Lines
Business credit lines for the last six months, including loans, invoice accounts, loans, and cards, affect your business credit score.
Similarly, credit inquiries for the last nine years or any credit inquiries affect it as well.
How To Improve Your Business Credit Score
You can improve your business credit score by paying attention to the following four tips:
1. Monitor Your Credit Reports and Report Any Inaccurate Information
It is advisable to monitor the credit reports regularly and report any wrong information entered. Sometimes a poor credit score results from inaccurate reporting that interferes with the data.
2. Don’t Close Unused Accounts
Unused accounts might seem like a bother, but they are suitable for credit information. So keep them open as long as possible.
3. Always Make Payments on Time
The leading cause of poor credit for many businesses is late payments. Make sure that you make your payments on-time and you will notice an improvement in your credit score.
If you realize you won’t be able to make payment on-time with a vendor, it’s best practice to be honest and let them know in advance. They might be understanding and push back your payment terms or even offer you a discount, especially if you already have a good working relationship.
4. Encourage Vendors to Add References
Your vendors adding references by filing positive reports to bureaus on your behalf will lead to an uptick in your score over time. You can ask your vendor to either reach out directly, or simply list them as a reference.
In-Summary: How to Check Your Credit Score
Businesses analyzing their credit should consider using the right tools to determine their credit status. Dun & Bradstreet, Equifax, and Experian are the best tools to analyze credit because they offer reliable reporting.
After analyzing your credit score, your next step should be taking action to improve it by paying bills on time, encouraging business partners to add references, and regularly analyzing credit reports.
Grey was previously the Director of Marketing for altLINE by The Southern Bank. With 10 years’ experience in digital marketing, content creation and small business operations, he helped businesses find the information they needed to make informed decisions about invoice factoring and A/R financing.
