Business Credit Score: What It Is (And Why You Need to Know)

While there’s some debate in American politics over whether or not “corporations are people,” it is true that businesses have credit scores and can receive credit reports the same way individuals do.

And much like how people and their lenders can check those scores at any time, small business owners can check the credit score of their company to see its strength—and whether they’ll be eligible for trade credit, business financing, and other financial opportunities.

A credit score for your business begins to form the moment the business is created, since credit bureaus use public records and financial data to create a preliminary report.

Then, just like with a personal score, the business credit score changes depending on a variety of factors, including payment history, outstanding debt, company size, company age, and industry type (and mostly, industry risk).

Here’s a rundown of business credit scores, including how these scores differ from personal credit scores, what services to use if you want to learn your score, how it’s calculated, why it’s important to check, and how to build it.

What is a Business Credit Score?

Your credit score is the key to your financial life:

It’s a number—in the case of business credit scores, it’s usually (but not always) a number from 1 to 100—that represents how trustworthy your business is, whether institutions should lend to the business, and how much they can lend.

A high score is a shorthand telling creditors that your business has paid back lenders on time (or even better, ahead of time) in the past.

A short list of factors affecting your score also includes:

• Credit utilization ratio
• Payment history
• Length of credit history
• Public records that include bankruptcies and judgements
• Company size
• Risk factors in your industry

Most of these bullet points make up what it takes to have a strong personal credit score, too. But unlike personal credit records, which only you can obtain about yourself, business credit scores are mainly based on public information and are available to anyone willing to pay for it.

(Competitors, for example, can do their research and see your credit score.)

Another major difference between personal and business credit scores is that business scores don’t stick to a single industry standard—they can vary in terms of what algorithms are used.

How Can I Check the Credit Score of my Business?

There are plenty of major online credit agencies, but the biggest name in the industry is Dun & Bradstreet, with a database of information on over 235 million companies around the world.

Other commonly used agencies include Experian and Equifax. But as we mentioned above, each agency charges for producing a credit report and goes about collecting information and analyzing it differently.

That’s why scores from each company could end up drastically different.

Choose the credit bureau that’s right for you and your business, and fill out the necessary forms provided.

Dun & Bradstreet charges $61.99 for a report and, along with a credit summary and credit risk score, provides a PAYDEX score, financial stress score and industry payment benchmarks. Equifax charges $99.99 and includes public records and a business failure score. Experian charges a mere $36.95, but also provides only the most basic information.

While each bureau has different methods and different interpretations of scores, the major agencies use the 1 to 100 scale with the understanding that a score over 75 or 80 means good credit—a low risk to lend to, and a business that generally pays back their debts either on time or 20-30 days sooner than terms require.

When you receive your credit report, it’s important to review the data and make sure everything collected about your business is accurate. You can correct bad data and get credit bureaus to update your information, as long as you have proof.

Regardless of what agency you use, but especially if you go with Dun & Bradstreet, it’s a good idea to get a DUNs number, which lists you in the company database and sets up a credit file.

If you’re the owner of a new business, this will get you on the path to establish good and accurate credit early. It’s free to apply for a nine-digit number, and reportedly some institutions—including the United States government—require a DUNs number before working with a business or vendor.

Not every agency provides a score along the 1-100 scale:

FICO has a Small Business Scoring Service, with a range from 0-300 (the higher the better), which ranks businesses by how likely they are to make payments on time.

A minimum score of 140 will pass the Small Business Administration’s pre-screen process and create opportunities for term loans, commercial loans and lines of credit from the SBA.

What your Score Tells You, and Others, about your Business

The Dun & Bradstreet PAYDEX score can be broken down into three tiers: scores between 80-100, scores between 50-79, and scores 49 and below.

The highest range indicates a low risk of payments, with a score close to 100 meaning payments often come promptly or sooner than 30 days within terms.

On the other hand, a score of 1-19 indicates that the business often takes more than 120 days to make payments.

The types of payments that can be reviewed by D&B for their PAYDEX score include paying back lenders for business loans, but also paying back money owed to suppliers of raw materials, utility companies, insurance companies, companies that lease assets like office equipment and vehicles, and more.

Experian’s credit report, called the “Intelliscore Plus,” is also based on a score from 1-100, but includes a risk classification from 1-5, with 1 being the least risky. A risk class of 3 is a “medium” or average risk, and 5 correlates with an overall score of 1-10—meaning a high risk for payment delinquency.

With this information, vendors, suppliers, and lenders can decide what kind of terms to extend to your business in regards to their payment. Common terms usually include paying a bill within 30 days, but companies with a high credit score can usually obtain better terms, like “net 60” days to pay it back.

Having more time to pay back a bill gives a business better control over cash flow and lets your business keep improving its score over time.

It’s a cycle that feeds itself—and only begins to sour when the business fails to meet even the generous terms it’s given.

How to Monitor Changes to your Credit Score

A good credit score can go bad quickly:

According to D&B, 1 in every 3 businesses will see a decline in their credit score over a three-month period.

Instead of paying for a snapshot of your credit score every year or even a few times a year, another option is to pay a regular fee for credit monitoring. The companies mentioned above (including Equifax and Experian) offer varying levels of this service at several price points.

By monitoring your credit score consistently, you can catch and address changes to your rating before they affect future dealings.

Some services will send you business alerts relating to bankruptcy, judgements, liens, charge-offs, new inquiries, and large score drops. You can also review your credit file with unlimited access at any time, which helps when developing a long-term strategy for cash flow going forward.

Another benefit to monitoring is the ability to identify business identity theft in the early stages, instead of after it’s too late.

How to Improve your Business Credit Score

There are a number of reasons why a small business may not have a quality credit score.

The first issue is time:

A new business simply doesn’t have the credit history, good or bad, to allow a credit agency to decide one way or the other. This isn’t unlike a young adult having relatively no credit, and needing to build their credit history over time.

Other ways to improve a business credit score include:

• Pay bills on-time or before they are due. The most obvious step is to get your business on a timely payment schedule and execute accordingly.
• Open multiple lines of credit. There are several possible avenues for building credit, whether it’s using a business credit card, taking out loans or establishing trade lines. Give your business the opportunity to build credit from multiple outlets at the same time. This is the process of opening up different kinds of credit. Having a “mix of credit,” like a business credit card, a line of credit, and an installment loan can help build your business credit—provided you’re using each account responsibly.
• Maintain a decent “credit utilization” ratio. It’s not enough to simply own a business credit card—a business owner must actually use that card and make payments on it. On the other hand, constantly maxing out your lines is also a red flag. Keep your credit utilization at around 25% to keep creditors happy.  

Another thing to keep in mind: while business credit reports are derived only from the accounts under the company name, business lenders and credit card companies will also check your personal credit.

If your business has fine credit but you personally are often late making payments or have judgments against you, the credit terms for your business could suffer.

Why Checking your Score Matters

It’s a thin line between success and failure in the world of small business.

Having as much information on hand about your business’s past and predicted future is imperative to staying ahead of the game. It’s possible to operate without knowing your business’s credit score, but rest assured that those who enter into dealings with you probably will, and might even use that information to create terms that aren’t to your advantage.

And as mentioned above, sometimes credit scores are based on inaccurate data—and only by reviewing what’s on file can you change what’s being reported and create a better reputation for your company.

Credit scores change all the time, and are based on forces both in your power to control and outside of them. By taking control of what you can change and becoming aware of what you can’t, you’re more likely to be able to improve your score and open up opportunities for increased financing, better cash flow and more substantial business opportunities.

Check your business credit score—and keep checking it—to help your business grow strong. In the meantime, check out the business loans available for bad credit.

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from Fundera Ledger https://www.fundera.com/blog/checking-business-credit-score