Business credit scores are some of the most important benchmarks financiers look at before offering lines of credit to businesses. So what is a good business credit score, and what contributes to its calculation?
Business credit scores are determined based on business longevity, payment history, and the amounts owed to financial institutions. Lenders often look at a business credit score range, which often varies depending on the system of scoring. Favorable credit scores and their systems are discussed in more detail in the upcoming sections of the article. Regardless of the systems, understanding how business credit works is crucial to building a decent score since small businesses rely on capital to expand their firms. Read on as we discuss the various aspects of business credit and how you can work towards improving it.
What Is a Good Business Credit Score?
It’s no surprise that financing is crucial for both the functioning and survival of businesses. Business credit scores play a critical role in determining financing eligibility. Unlike consumer credit scores, business credit scores vary depending on the reporting company and are not standardized. Each reporting company has its own scale for scoring a business’ credit rating and considers a variety of factors before putting them down on the scale. Some of the popular business credit scoring scales include:
- Small Business Score by FICO: The FICO system scores businesses on a scale of 300, where 140+ is considered to be a decent number for businesses looking to gain financing.
- PAYDEX by D&B: The Dun & Bradstreet system provides an overall score on a scale of 100, where lenders often expect to see a score of 80 and above.
- Business Credit Report by EQUIFAX: EQUIFAX assesses business credit scores on a unique scale that ranges from 101 to 992. It accounts for both business risk and risk of business failure. Scores of 570 and above are usually considered to be favorable for businesses looking to avail of financial assistance.
- CreditScore by Experian: Experian too, uses a range that goes up to 100 to rate businesses on their credit scores. 76+ is usually taken to be favorable for businesses that are weighing their options and looking for financing.
These firms take into account numerous factors while assigning a score to your small business. A composite score is then prepared, which is ranked on the scale designed by the respective companies. It’s important to note that the listed firms charge a fee to deliver a business credit score report. While there are free options available online, business owners need to be vigilant due to the risk of data breaches.
Why is Credit Score Important
The most obvious benefit of small business credit scoring is the seamless access to finance that it provides. Apart from this, a favorable business score range also entails numerous other advantages that business owners can make the best of, these include:
Low-interest Financing
Financing at low-interest rates is made possible by a good business credit score. This can help you reduce the financial burden on your company, while also opening doors to easier repayment.
Separation of Personal & Business Finance
Having favorable credit scores also has other benefits such as borrowing on behalf of the company instead of signing personal guarantees with the financier. In case of repayment issues, the separation ensures your personal assets are protected from settlement claims. This also helps you remain equipped to manage finances in your business.
Easier to File Taxes
The tax system promotes the separation of finances. Segregating your expenses to delineate business expenditures and supporting them with a business credit score can also go a long way in simplifying tax filing.
Better Deals on Insurance
Small businesses often have to pay exorbitant insurance rates that quickly turn into a burden for a budding business. Having a good credit score can help your company get better insurance rates, allowing you to secure your business without worrying about steep premiums.
What Affects Business Credit Scores?
Numerous factors are taken into account when credit rating firms assign a score to your business on their credit score scales. This includes simple figures such as business age and also complex components such as aggregates of open accounts. Here’s what affects business credit scores for a company:
- Business Age
The duration you’ve been in the business is one of the primary factors that firms consider when assigning a score. The longer your business has thrived, the better your prospects are at getting a favorable score.
- Debt
All outstanding business debt will be factored into your business credit report. Timely repayments have a positive impact on the business credit score and increase the chances of your business receiving future approvals.
- Business Assets
The total of the assets owned by your small business plays an important role in your business credit score. Valuable assets such as property are bound to raise your firm’s score.
- Loan & Repayment History
Credit score firms analyze the history of your company’s loans and repayment schedules. Timely repayments in the past account for positive effects on business credit scores. Firms might even consider repayments of your personal loans and factor the same into your business’ score.
- Public Reports & Records
Lawsuits – both personal and business-related – will be taken into account when assigning a business credit score to your company. Any criminal track record is bound to reflect negatively on the final score.
- Business Risk
Few firms also consider business risk as a component when awarding a credit score to small businesses. High-risk businesses such as those in the commercial food industry are likely to be viewed through a different set of benchmarks when compared to businesses that come with lower risk.
How to Check Business Credit Score
To know how to raise your company’s business credit score, you must regularly monitor it. The easiest way to obtain credit scores is to approach the firms that provide reports for businesses. Firms such as EQUIFAX, Experian, and D&B are known to offer detailed business credit score reports for businesses looking to get assessed.
Despite the free options available online, business credit scores from premium, trusted firms can help your business address its weak points and allow you to improve your business’ credit score over time. Free services also come with risks of data theft and unreliable information. Checking your credit score is also a key undertaking for entrepreneurs to gauge what affects it and how it can be improved.
Checking your firm’s score at least once every quarter and numerous times every year is essential in streamlining your firm’s financial reputation and meeting the requirements for better business funding. This is especially important if you’re looking to apply for business loans in the near future. Since most financiers take a look at your business credit scores, checking frequently and improving on the relevant parameters are key to helping your business grow.
How to Improve Business Credit Score
Now that you understand what affects business credit scores, improving your existing business score is the next step. Here are a few methods on how to get your business to achieve a good credit score:
Utilize Credit
Since most scoring firms rely on repayment history, availing credit for your business is key to creating tangible records for credit score firms to use as a reference during score evaluation. Making use of credit lines responsibly can also help your business grow with relative ease and also promote better business performance and financial practices that in turn positively impact your firm’s credit scores.
Avoid Using Maximum Credit
Leaving behind zero credit is not a wise business decision. Having up to 30% of the total credit as reserves is a sign of responsible utilization. Both financiers and credit scoring firms take this into account when analyzing your business’s financial health and practices.
Ensure Regular Bill Payment
Paying utilities and other bills on time can have a positive impact on your business’ reputation. Scoring firms account for nearly all types of financial transactions of your company. Early or timely payment of bills is the mark of a responsible business that intends on making regular payments. Working with vendors that report to scoring firms is an added benefit.
Engage with Firms Using a Business Identity
Registering your firm as a corporation or an LLC gives your business a legally valid identity. Transacting and engaging with other firms under this identity adds a layer of legitimacy to your dealings, and can positively influence your business credit score.
Analyze Your Business Credit Score
Analyze your credit score upon receiving the report and identify areas that require further work. Look to improve with legitimate methods and make way for tangible improvement to ensure your business is better positioned to receive financial support.
Sum Up
While credit scores are crucial to businesses looking to raise capital, it’s important to note that businesses also have other useful means to receive funding such as invoice factoring. It entails a seamless financing option that does not rely on business credit scores and other parameters to ensure funding for your business. Regardless, maintaining a healthy range on the scale is key to a healthy business reputation and also ensuring your business remains attractive to prospective financiers in the long run.
