The What, Why & How of Small Business Credit
Your business credit score is similar to your personal credit score. However, business credit determines your company’s creditworthiness instead of your personal creditworthiness. There are some other significant differences between business and personal credit scores as well. For example:
When your business is sailing smoothly, a strong credit score can help you get the most capital with the best rates and terms in order to help you grow or expand your business. And when the water gets rough, a good credit score can also help you get the money you need to keep your business afloat.
Your business credit score helps lenders analyze your business’s creditworthiness and determine the kind of loans you will be offered, along with the interest rates and terms associated with those loan products. A poor business credit score will eliminate many loan options right off the bat, and make your remaining loan options significantly more expensive and less appealing. However, a strong credit score will open up your lending options and enable you to fund your business at a much more appealing cost.
Even if your business strategy is to avoid loans and credit entirely and only use cash on hand, business credit can still prove essential to your business. Keep in mind that even if nothing unexpected ever happens to change your mind about getting a loan, there are other reasons to check your business credit and keep it seaworthy. For example, your credit score is accessible to anyone who is willing to pay for it. This means that often times vendors, suppliers, and affiliates will check your business’s credit score before deciding whether or not they will work with you. So, while you are not forced to check your business credit score, it’s a sound strategy to monitor and try to improve your score.
We get it: you can’t control certain factors relating to your business credit any more than you can control the weather. Your business’s age is one of those. But that just means you can focus even more on the elements you can control. Be timely with your payments as often as possible, and don’t use all your available credit unless necessary. If you’re thoughtful about how your actions will affect your credit, you’ll find yourself building business credit in no time.
Think of your business and personal credit scores as two halves of the same coin. Even if your business credit is excellent, a poor personal credit score can also affect your ability to be approved for certain loan products and decent rates and terms. Particularly for small businesses, lenders often realize they’re lending not only to a business but to the owner of that business. If your personal credit score portrays you as unlikely to repay your debts, it may negatively impact your overall evaluation. But on the upside, maintaining a solid personal credit score can often decrease the negative impact of a mediocre business credit score.
And don’t fret. If your personal or business credit score is less than ideal, it isn’t impossible to get credit. In fact, even if you use credit wisely, it will be difficult to attain a low-risk rating because your business is small. Luckily, there are other factors lenders consider that can compensate for your struggling credit score. Your overall financial statements, your current debt to credit ratio, and the size of your business can all work on your side if you’re operating well now but have had credit trouble in the past. You should also keep in mind that certain loan products are excellent at building credit for your business – so much so that it may be worth considering taking certain loans even if you can afford to cover your costs with cash. For example, equipment loans, business lines of credit, and business credit cards are all fantastic ways to immediately start improving your suffering credit score.
There are three primary credit bureaus for business credit: Experian, Equifax, and Dun & Bradstreet. Each of these bureaus uses its own algorithms and methods to calculate your business’s creditworthiness.
Experian provides a CreditScore report, which is a combination of a business credit score and other information, such as payment trends, account histories, and public records. Your score will be a number between 1-100, and will take multiple factors into account. These factors include but are not limited to:
Equifax assesses credit scores with a combination of their payment index, credit score, and business failure score. Equifax’s payment index is similar to Experian’s business credit score, reflecting the amount of payments your company made on time to both vendors and creditors. It will also read as a number between 1-100.
Their credit risk score focuses on the chances of your business becoming severely delinquent on payments. This number will range between 101-992. This takes into account the size of your company, available revolving credit, and the time since your first financial account was opened, among other things.
Equifax’s business failure score determines the likelihood of your business closing. This score will be between 1,000-1,880, evaluating things such as your balance to credit limit ratio in the past three months, the time since your first financial account was opened, and the worst payment status among your transactions in the previous 24 months.
Dun & Bradstreet calculates their score with what’s called a PAYDEX score, between 0-100. This is a number designed to recommend how much credit a lender should offer you based on your payment data. You don’t automatically have this score, however. In order to obtain one, you must file for a DUNS number through Dun & Bradstreet’s website. This is free and relatively simple, though Dun & Bradstreet must have records of your payments with at least four vendors.
Their credit score is a number between 1-5 – the lower the number, the better. This number compares your company with those that have similar payment histories in order to help lenders determine your business’s strength, though it doesn’t directly reflect any payment history from your small business.
Similarly, Dun & Bradstreet’s financial stress score also ranges between 1-5, evaluating your company against similar businesses in terms of financial other business statistics. This includes size, payment delinquency, and other factors. This rating is designed to express a broader picture of your overall company’s position as opposed to purely evaluating payment history.
If you’re generally good with paying your bills on time and don’t frequently max out your available credit, there are a few things to keep in mind before accepting a surprisingly low business credit score.
It’s important to know that because each bureau collects and verifies its data differently, it’s often up to you to police your own score. Credit bureaus gather their data on your business from a mixture of banks, trade associations, and credit card issuers, and verify this data through third parties. This means that the data can be wrong. And that’s where you come in.
If you check your business credit score frequently, you’ll occasionally find that mistakes. Sometimes it’s simply an error on the bureau’s part that can be cleared up by you contacting them and providing evidence that the data is incorrect. Other times, you may find that your vendors have not gotten around to reporting your payments yet and your score will falsely reflect overdue or delinquent payments. This can be handled by either contacting the bureau with evidence of payment, or by contacting your vendor and requesting that they update their reports with the bureau in question.
But ultimately, If your credit score is taking on water, the only real solution available to you is adopting new credit habits for the future. Since your credit score is a reflection of your credit and payment patterns over a long period, it will take some time to patch up the damage when your credit does take a hit. Unfortunately, there’s no way to quickly remove blemishes on your credit, but the sooner you begin proactively taking steps to fix your credit score, the sooner your lousy credit can be a thing of the past.
To turn your credit score around, focus on minimizing your outstanding debt, avoiding overextending your business, and making sure you only apply for credit when there is a reason or need for it. And of course, the most impactful thing you can do is start paying your bills on time. Late or delinquent payments and payments that have gone to collections will quickly add up and negatively impact your credit score.
So get back out there and raise your sails. Good credit awaits just over the horizon.