As a business owner, your access to capital is crucial to both the survival and growth of your small business. But getting access to financing when you need it can be difficult, especially when you’re first starting out.
Establishing a business credit score is a good way to improve your chances of getting approved for business financing. It can also help protect your personal credit score, which is often used in situations where a business owner doesn’t have a strong enough business credit history.
Here’s what you need to know about business credit scores, why they’re important and how to establish one for your company.
What Is a Business Credit Score?
A business credit score is similar to a personal credit score in many ways. The primary purpose of the score is to provide a quick snapshot of how well your small business manages debt. The better your business credit score, the better your chances will be of reaping the benefits a business credit history can provide.
There are, however, some key differences between business vs personal credit scores. For starters, of the three national consumer credit bureaus, only Experian and Equifax offer credit reporting and scoring for small businesses. Dun & Bradstreet is another reporting agency that tracks business credit scores, and you need to apply to have your business show up on its records.
Also, whereas your personal credit score can range from 300 to 850, business credit scores typically go from 1 to 100.
Finally, business credit scores aren’t personal information like a personal credit score. In other words, anyone can look up your company’s credit score, though it’s typically not free to do so.
Why Is a Business Credit Score Important?
If you’re running a small business and anticipate needing financing at some point in the future, building and maintaining a good business credit history is crucial. Keeping your business credit score high can also impact your business positively in other ways:
- You can get cheaper financing: When you apply for a business loan, the lender will run a credit check to determine whether or not you’re likely to default. If your business has had trouble with managing its debts in the past, the resulting low credit score could make it difficult to get approved for a loan. Even if you do get approved, you may end up with a high-interest rate, which eats into the profits for your business.
- You can qualify for lower insurance premiums: When you apply for various types of insurance for your small business, the lender may consider your business credit score when calculating your premiums. This means that a low business credit score could result in a higher rate.
- It could protect your personal credit and liability: If you don’t have a business credit history or your business credit score is less than stellar, a lender may require what’s called a personal guarantee. This means that if your company can’t repay the debt, you’re liable to pay it off using your personal assets. If you can’t, the lender may report the delinquency or default to the consumer credit bureaus, damaging your personal credit score. Also, because the lender is relying on you to back up your business, it’ll also typically run a personal credit check, which can impact your personal credit score.
- It can impress potential investors and vendors: As a business owner, you may work with a number of investors and vendors to achieve your goals for your company. Maintaining a high business credit score — which, again, they can look up on their own — can give them more confidence in working with you and your business.
How to Build Your Business Credit Score
The process of building and maintaining a good business credit history is similar to the steps you need to take with your personal credit. However, there are also some differences.
- Register your business: Your business must be legally registered and have an employer identification number (EIN) in order to have a business credit score. If you’re a sole proprietor, there’s no separate business entity, so you can’t have a business credit score. If this is the case, consider establishing a limited liability company (LLC), limited liability partnership (LLP) or corporation.
- Get a business bank account: While a business bank account won’t directly impact your credit score, it’s crucial to separate your business from your personal expenses. When you apply for a loan, lenders will use this information to determine whether or not to provide you with funding.
- Work with vendors that report: Certain vendors will report payments from small businesses to the commercial credit bureaus. As you look for vendors to work with to get things like equipment, supplies and inventory, ask about their reporting practices. It can also be a good idea to apply for a business credit card, as major business card issuers generally report your activity to the business credit bureaus. Just keep in mind that some, including Capital One and Discover, may also report your activity to the consumer credit bureaus, which can help or hurt your personal credit score.
- Pay on time or even early: As with your personal credit score, making on-time payments is one of the most important things you can do to build a positive business credit history. With some business credit scores, including the Dun & Bradstreet PAYDEX score, you can only achieve the highest score available if you pay early.
- Check your business credit scores: Over time, it’s important to check your credit scores regularly to see how your actions impact your scores. You can get free access to your scores with companies like Nav. If something seems amiss, you can also check your business credit reports, but it typically costs money to do this.
The Bottom Line
Building your business credit score can take time, and it’s possible that you’ll run into hiccups along the way, especially if your cash flow is irregular. But making an effort to establish and maintain a good business credit score can be vital to building the kind of business you want.
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Information contained in this blog is for educational and informational purposes only. Nothing contained in this blog should be construed as legal or tax advice. An attorney or tax advisor should be consulted for advice on specific issues.
