As a business owner, your access to capital can be crucial at several milestones in your small business: getting started, weathering seasonal shifts or emergencies, and making incremental growth or expansion.
As with a personal credit score, establishing a business credit score is one way to improve your chances of getting approved for financing. A business credit score 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, including why they’re important and how to establish one for your company.
What Is a Business Credit Score?
Similar to a personal credit score, a business credit score provides 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 and personal credit scores:
- Privacy: Business credit scores aren’t personal information like personal credit scores. In other words, anyone can look up your company’s credit score, though it’s typically not free to do so.
- Credit Reporting: 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.
- Credit Score Range: While your personal credit score generally ranges from 300 to 850, business credit scores typically go from 1 to 100.
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 can be a valuable strategy. Here are a few reasons why.
You may get cheaper financing. When you apply for a business loan, typically the lender will run a credit check to determine your eligibility for approval, as well as rates and terms. 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, this process also typically includes running 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 investors and vendors to achieve your goals for your company. Maintaining a high business credit score — which, as a reminder, 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, separating your business from your personal expenses can help minimize your personal risk. When you apply for a loan, lenders will use any business account information you have as a factor for approval.
- Consider a business credit card: 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, depending on any personal liability involved, issuers may also report your activity to the consumer credit bureaus which could help or hurt your personal credit score.
- 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.
- 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.
Final Considerations
Building your business credit score can take time, but taking steps to establish and maintain a healthy score can be vital to building the kind of business you want. When you’re ready to explore your financing options, shop around and communicate with potential lenders to help determine the best fit for your business.
Information contained in this blog is for educational and informational purposes only. Nothing contained in this blog should be construed as financial, legal or tax advice. An attorney, financial advisor, and/or tax advisor should be consulted for advice based on your circumstances.
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