As a buyer, you probably know how significant it is to establish and keep a high credit rating. What you may not know is that firms have the same obligation.
Credit bureaus, loan providers, and potential clients and suppliers can all get a sense of your business’s trustworthiness thanks to a business credit score. A higher business credit rating, like a better personal credit rating, indicates greater credibility to potential creditors.
Continue reading if you are an owner of a business and want to learn more about how to establish a strong business credit rating for your company.
What Is a Business Credit Score?
You can think of a company credit rating as a numerical representation of the same notion behind personal credit ratings.
A business credit rating is essentially the same thing as a personal credit rating, only it is applied to assess firms. Details from a business credit record are applied to calculate a firm’s credit rating. This report can include data such as the firm’s number of employees, its length of operation, its installment history, account details, outstanding debts, and more.
You may have noticed right away that corporate credit ratings are not in a similar numerical range to personal credit ratings. Although the majority of company credit ratings use a scale from 0 to 100, ratings generated by the FICO Small Business Scoring Service (FICO SBSS) can go as high as 300.
How Are Business Credit Scores Determined?
Payment history, or the extent to which bills are paid on time, is the single most essential component of both your personal and company credit ratings.
The length of time that your company has been in operation is also factored into business credit ratings; the older your firm is, the better your rating is likely to be.
In addition, a business credit rating is based on a number of factors, including the company’s size, kind of industry, and installment history, as well as the amount of debt it carries and how it is applied.
Different methods are applied by each agency to collect and verify data. The majority of the data applied by bureaus comes from the installment processing industry. In most cases, this data is checked by independent sources.
A company’s credit record could contain inaccuracies despite the fact that all of the corporate credit bureaus say they thoroughly check all of the data they collect. If you find inaccuracies in your credit record, contact the relevant bureaus and provide proof of the inaccuracy.
Types of Business Credit Scores
The FICO SBSS Credit Score, Experian Intellirating Plus, the D&B Paydex Score, and the Equifax Risk Score are the four types of business credit ratings that owners should be familiar with.
Each of these is explained below.
FICO SBSS Credit Score
Generally, this is the rating applied by creditors to assert whether or not to extend a Small Business Administration (SBA) loan.
The SBA requires a rating of at least 155 to proceed to the next phase of the application procedure. The majority of creditors, nevertheless, have a minimum rating demand somewhere between 160 and 165.
The FICO SBSS Credit Score is unique among business credit ratings in that it takes into account both individual and company data.
Owners with a 20% shareholding or more will have their personal credit ratings included in the FICO report, with a maximum of five individuals’ ratings included. Your company’s overall revenue, staff count, number of years in operation, number of other debts, and more will all be considered by FICO.
Experian Intellirating Plus
Both the Intellirating Plus and the Intellirating Plus v2 are available from Experian. Particularly if the company is still young, Intellirating Plus may incorporate personal credit data into the Intellirating.
By utilizing Experian’s extensive trade, collection, public record, and firmographic data, Intellirating Plus v2 helps you make quicker credit choices.
D&B Paydex Score
On a scale from 0 to 100, an 80 D&B PAYDEX Score is generally considered to be stellar.
Paying on time or even ahead of schedule can boost your rating, whereas paying late will lower it. Installments that are 31–90 days delayed will have a stronger effect than installments that are 15–30 days late.
If you want to receive a D&B PAYDEX Score, you must first register for a D-U-N-S Number on its website. This will enable your suppliers and vendors to record your installment history to D&B.
Without them reporting your activities, you won’t be able to establish credit with PAYDEX.
Equifax Risk Score
Equifax Risk Score is one of two company credit ratings generated by Equifax. The Equifax Risk Score predicts whether or not a company is likely to experience serious delinquency or charge-off during the next 90 days or within the following 12 months.
The Equifax Risk Score ranges from 101 to 992, and it takes into account a wide variety of data, such as:
- business size
- a readily accessible credit limit on revolving credit accounts like credit cards
- age of the oldest financial account
- any evidence of delinquent or charged-off nonfinancial transactions, like invoices from a vendor, for two or more billing cycles.
Business vs. Personal Credit Scores: What’s the Difference?
It’s vital to grasp how business credit ratings differ from personal ones.
- The scale applied to assess a company’s credibility is normally much lower than the one applied to assess a personal credit rating, with ratings normally ranging from 1 to 100 for the latter.
- Employer identification numbers (EINs) are applied in place of Social Security numbers to identify firms for tax purposes.
- When it comes to business credit ratings, unlike personal credit ratings, anyone can see them. Your company’s credit rating can be viewed by anyone through one of the reporting bureaus; nevertheless, this may incur a fee.
Why Do Business Credit Scores Matter?
For a new venture, financing normally comes from the owner’s personal credit. If everything is going well, you may be questioning why you need to have a credit line just for the business.
- Obtaining a loan might be less of a hassle. Raising your chances of acquiring a loan for your small business in the stellar condition is possible by establishing a strong business credit rating.
- Reductions in insurance premiums might be possible. The cost of insurance for your company may rise as it expands. The interest rates may be maintained at a lower level if the business’s credit rating was higher.
- Separation of personal and business funds.Having a separate business credit profile is a stellar way to keep your professional and personal affairs distinct. Keeping your business and personal funds separate makes it simpler to report and pay taxes on business income and expenditures.
- Capacity for debt financing grows. If your business credit rating is excellent, you may qualify for greater loans.
How to Check Your Business Credit Scores
There are a few instances in which you may gain access to a free credit record or rating for your business. For instance, Nav provides free access to Dun & Bradstreet, Equifax, and Experian business credit records and ratings in summary form.
To keep you apprised of any changes to your company credit record, Dun & Bradstreet offers a complimentary service called CreditSignal.
Keeping tabs on your business’s credit ratings might alert you to issues like a vendor reporting a late installment in error or identity theft. D&B reports that in 2020, commercial identity theft increased by 258%, therefore company leaders should be vigilant.
How to Improve Your Business Credit Score
Immediately explore the following steps if improving your business credit rating is your priority:
- Have your company’s bills paid on time or ahead of schedule – More than anything else, your company’s installment history will assert its credit rating.
- Make sure there are credit categories for firms that may report transactions – Take note that not all commercial creditors disclose trade and line of credit data.
- Make regular and responsible use of credit – You can gradually develop firm credit by drawing money and repaying it on time and in accordance with the terms of the loan.
- Keep a close eye on the firm credit rating – In order to keep up with any alterations or modifications to your firm credit rating, you should check it religiously.
- Maintain your company’s credit usage below 30% – Use no more than 30 percent of your accessible credit between firm credit cards and other lines of credit.
A business credit rating is like a personal credit rating in that it demonstrates how responsible you are with your company’s finances. Creditors and suppliers want to know if they can count on acquiring their money back, therefore they do due diligence to assert the debtor’s repayment capacity.
We know the relevance of your business to you. Therefore, you should be aware that anticipated creditors, investors, and firm affiliates will look at your firm credit rating as one of the most crucial pieces of data in their decision-making process. For this reason, it is vital to maintain awareness of the latest developments.
You should use a company bank account and credit card for all firm transactions. Make early installments to creditors who report to the company credit recording bureaus. Once you have established these positive routines, it’s essential to oversee your credit ratings on a regular basis to verify their accuracy.