Understanding Business Credit Scores and How They Work

As an entrepreneur launching a startup for the first time, you probably wonder if business credit scores exist. The straightforward answer is yes! But unlike personal credit scores, they work a little differently and also get influenced by various factors run by different credit bureaus.

Here’s the catch: According to the Federal Reserve Banks’ Small Business Credit Survey, nearly 60% of small businesses had fair or poor financial conditions, which might mean they have poor credit scores. 

Further, another survey reveals that most entrepreneurs apply for business loans for the following reasons:

• Business expansion (42.4%)
• Equipment purchases (29.4%)
• Marketing and advertising (28.6%)
• Business franchising (27.6%)
• Commercial real estate purchases or remodeling (26.8%)

But the question is: do they have good credit standing to get loan approval?

This page helps you understand the importance of business credit scores. But first, read on to learn:

• What they are and how they work;
• What key factors impact these scores; and,
• How to improve your credit score.

Contents:

1. What is a business credit score?

• Commercial credit bureaus
• Good business credit scores
• Key differences between personal and business credit scores

2. How do business credit scores work?

• 3 primary factors affecting business credit scores

3. The importance of business credit scores

• From lender’s perspectives
• From entrepreneur’s perspectives

4. How to access, manage, and improve your business credit scores

What is a business credit score?

A business credit score measures a company’s creditworthiness. The score reflects the business’s financial risks and ability to repay debts. 

Business credit scores show the financial health of companies. But of course, they apply to businesses of all sizes, whether small and mid-sized enterprises (SMEs) or big corporations. 

A good credit score lets you secure business funding, get favorable terms, and protect assets. The higher your score is, the higher your chance is for loan approval.

Commercial credit bureaus:

Credit rating agencies are responsible for monitoring, measuring, and providing business credit scores. These commercial credit bureaus are the following:

• Experian: Experian is known as a credit bureau for personal credit reporting. However, it also caters to businesses assigning credit scores from one to 100. They go beyond payment histories for their estimation.

• Equifax: Same as Experian, Equifax covers personal and business credit reporting. It comprises three score types: 1 to 100 for timely payments, 101 to 992 for possible late payments, and 1,000 to 1,080 for constant delinquent payments.

• D&B: Dun & Bradstreet focuses only on businesses, unlike Experian and Equifax providing personal credit reports. Its PAYDEX 100-point score system assigns an 80 or higher rating to companies with lower financial risks.

• FICO SBSS: FICO Small Business Scoring Service (SBSS) helps financial institutions or creditors make lending decisions. Small Business Administration (SBA) uses the FICO SBSS score when businesses apply for loans of up to $350,000. A good score ranges from 140 to 300.

Good business credit scores:

To give you an idea of what good business credit scores are, look at the table below from popular reporting agencies:

A business credit score is the highlight of a credit report. However, this report also includes the following:

• Business information (name, address, and phone number)
• SIC or NAICS industry code
• Business age (years of operation)
• Payment history
• Uniform Commercial Code (UCC) filings
• Legal issues (lawsuits or court judgment when applicable)
• Collections and Bankruptcy

Key differences between personal and business credit scores

Most people are familiar with the concept of personal credit scores almost all their lives. However, some entrepreneurs make the mistake of associating their business credit scores with personal ones, especially when applying for a business loan or even opening a business savings account. 

Looking to understand further? Note the key differences between the two:

• Credit score range: Business credit scores usually range from 0 to 100 (except FICO SBSS for small businesses). However, personal credit scores run from 300 to 85.

• EIN vs. SSN: The employer identification number (EIN) is associated with business credit scores. However, the social security number (SSN) is for personal credit scores.

• Rating standards: The business credit score algorithms vary from one credit bureau to another, each having a different rating method. However, personal credit scores are based on FICO algorithms used by consumer credit bureaus.

• Credit bureaus: The three major business credit bureaus are D&B, Equifax, and Experian, not to mention FICO SBSS for small businesses. But for personal credit scores, consumer credit bureaus include TransUnion, Equifax, and Experian.

• Credit access: Business credit reports are public, meaning those who pay can obtain these reports. However, only you and a few authorized personnel can access your personal credit score.

How do business credit scores work?

As mentioned, business credit scores serve as a measure of creditworthiness. Your score reflects your capacity to pay your loan and how high or low your financial risk is.

Now, banks, lenders, and other financial institutions obtain credit reports from various reporting agencies and rely on business credit scores for informed decisions. 

When you apply for business loans or plan to get invoice financing, they’ll refer to your credit score. Your score will determine if you’ll get approval. And once approved, it’ll also define and set your loan terms.

Note that your business credit score is accessible to the public. This means potential vendors, suppliers, and those looking to do business with you can also access your score.

If you have a good credit score, they’ll see you as a low-risk company and most likely do business with you. Meanwhile, a low score makes you a high-risk company, making it hard to partner with vendors and grow your business. 

Wondering how your business credit score gets evaluated? Credit bureaus, such as Dun & Bradstreet, collect your payment information and business data. They obtain this information from public records, through telephone interviews, and with other companies working with your business.

Learn more about the factors affecting your business credit score in the next section.

3 primary factors affecting business credit scores

Looking to improve your business credit score to gain financial advantage? Learn the different aspects affecting your score to know what to work on. 

Let’s cut to the chase — here are the factors impacting your business credit score:

1. Credit information

To know your business’s creditworthiness, dig deeper into your credit details. Below are the credit aspects affecting your score:

• Payment history: Your credit report consists of all the payment transactions your business made in the past. Timely payments significantly guarantee a good credit score. 

• Credit types: Your credit types also contribute to your credit score, whether you’ve applied for fixed business loans or credit cards.

• Credit utilization: This criterion refers to the ratio of credit used to available credit. In short, how you use your credit impacts your score. 

• Credit capacity: Your ability to pay off loans or business lines of credit can significantly determine your credit score.

• Payment Habits: Your credit score all boils down to how you manage your loans or lines of credit. Your payment history speaks for itself.

2. Public records

As mentioned, a business credit report includes your UCC filings and reports, such as liens and judgments against you. Consider the following: 

• UCC filing: Any business loans secured by collateral get reported to UCC. Being subject to collateral negatively affects your credit score.

• Liens: Any liens against your commercial property or assets are listed. Failure to comply with the agreements will impact your credit score. 

• Legal filings: Any lawsuits or court judgments from local, county, and state courts will affect your credit standing.

• Collections and bankruptcies: Loans forwarded to collections or bankruptcies receive a low credit score.

3. Business background

Of course, your business itself will define your credit score. For instance, how long your company operates affects your credit standing. Therefore, consider the following:

• Industry or niche
• Business type
• Business size:
• Years on file:
• Corporate financial data
• Standard Industrial Classification (SIC) code

The importance of business credit scores

Now, you might wonder why there’s a need to improve your business credit score. Same as your personal credit score, it provides plenty of financial opportunities for your company. 

Learn from business executives and experts. Here’s why you should strive to achieve a high business credit score:

From lender’s perspectives: 

Explore how lenders look at business credit scores as they affect your business in more ways than one. Consider the following:

• They influence loan approval. Jesse Galanis, Content Creator at Real Estate Skills, recommends maintaining a good credit score. “Lenders will approve your business loans quickly and easily if you take good care of your credit score. That can help your business financially, whether looking to purchase equipment or expand to a new market.”

• They affect loan terms. Getting loan approval is one thing; earning favorable loan terms is another. Lenders see your business as low-risk if you have a good credit score. As such, they’ll offer you more perks, such as low-interest rates and shorter loan terms.

• They mitigate risk. Mark Pierce, Cloud Peak Law Group, equates business credit score with financial risk. “Lenders see you as a low-risk business if you maintain a good credit standing. The higher your score is, the lower your risk is. This means you’ll get approval and better terms for your business financing.” 

From entrepreneur’s perspectives:

As a business owner, your credit score affects your financial opportunities, whether securing a loan or getting insurance. Take note of the following:

• They give you access to capital and financing. Jim Pendergast, Senior Vice President at altLINE Sobanco, highly recommends checking business credit scores. “Obtain your credit report from Dun & Bradstreet or pay for it through Experian and Equifax. You’ll be surprised at how a good credit score gives you access to business loans, insurance, and other investments.

• They help you negotiate better terms. Anthony Martin, Founder and CEO of Choice Mutual, underscores the importance of good business credit scores. “You may not know when your business might encounter an emergency or need funding for various projects. With a good credit score, you can negotiate better for favorable terms and conditions.”

• They can impact your vendor relationships. Jerry Han, CMO at PrizeRebel, highlights the value of business credit scores beyond securing loans and getting credit lines. “Your score can go as far as partnering with potential vendors and growing your relationships with them. But with a poor score, they likely won’t do business with you.”

• They can help maintain your business’s cash flow. Managing your cash flow is key to maintaining your company’s financial health. The goal is to earn more than you spend on your business. A good credit score can help minimize your expenses and maximize your profits. And when emergencies arise, you can easily and quickly get business loans. Understanding the vital role business credit scores play in a company’s financial health prompts many business owners to turn to business credit builder companies for help.

How to access, manage, and improve your business credit scores

At this point, you learned enough about what business credit scores are and how they work. More importantly, you’ve realized the benefits of maintaining a good credit score for securing loans, protecting investments, and growing your business.

Now, it’s time to learn how to access, manage, and improve your business credit scores. Consider the practical tips below.

• Obtain credit reports from bureaus. It’s best to check your business credit score regularly, not only when you need to apply for a loan. You have free options through Dun & Bradstreet; however, you’ll have to pay for Experian and Equifax.

• Collect and examine your reports. After obtaining your business credit report, find time to check the details. Make sure to identify and dispute errors and inaccuracies. The ultimate goal is to track your credit progress and improvements.

• Develop good payment habits. There’s no other way to acquire a good business credit score than to pay your bills on time. Have a goal to pay off your balances as soon as possible. A good payer can make a world of difference in your credit score.

• Negotiate payment terms. When dealing with financial loans, it’s not always rainbows and butterflies. There comes a time when you might have an emergency and won’t be able to pay your debts on time. The key here is to work with your lenders by negotiating favorable terms.

• Increase your credit limit. Strive to achieve this goal by managing your finances well and paying on time. Doing so lowers your credit utilization ratio and improves your credit score.

• Maintain lines of credit. Credit provided by suppliers and vendors is vital to business financing. Pay on time to maintain a good credit score. 

• Address negative public records. As mentioned, UCC filings, liens, and legal filings can impact your credit scores. Be sure to maintain clean records so you’ll be able to earn a good credit score.  It’s also beneficial to explore strategies on how to get bankruptcy off the credit report early if you’ve faced this issue. Although this process can be complex, taking proactive steps can significantly improve your business credit score.

• Separate your business from personal accounts. Many financial experts suggest drawing the line between your personal and business accounts. Doing so helps you manage your finances a lot better. That way, you can become a good payer and secure a good credit score.

• Don’t get too much debt. The rule of thumb is straightforward: Don’t bite more than you can chew. Apply for a business loan only when extremely necessary. More importantly, plan and set your budget to ensure you can repay this loan long-term.

Final words

It’s safe to say that business credit scores are essential for gaining financial advantage. A good score can offer your business several opportunities, whether gaining capital, securing a loan, or making investments.

Understand what credit scores for businesses are and how they work. Consider the key factors impacting these scores as discussed above. More importantly, follow our practical tips for accessing, managing, and improving your score.

With all these tips and steps, you’ll maintain a good credit score for your business long-term!