Like your personal credit, your business has its own credit scores too—scores that can help (or hurt) you in a number of ways. Thus, it’s best to know what they are and how they can affect you.
How can business credit help me?
A good business credit score can help you secure better interest rates on loans, decrease instances where you need to prepay for a specific product or service, and secure better trade terms with important suppliers in your industry.
Let’s say you’re looking to start a hair salon. You plan on purchasing salon equipment, such as expensive styling chairs and supply trolleys. In addition, you’ll need to keep consistent inventory of hair products. How do you plan to buy all this equipment and inventory?
Maybe you have money saved up or generous friends and family that are willing to help out. In the likely case that that doesn’t cover all your expenses, keep in mind that lenders and suppliers need a means of determining how well your business repays debts before they will approve you for financing or favorable payment terms. This is where business credit scores come in. A lender can check your business credit report and/or pull your business credit scores to see how likely you are to make on time payments.
Whether it’s equipment and inventory for a hair salon, construction materials for a home repair company, medical supplies for your office, etc., startup costs, expansion costs, and general running-your-business costs can add up to much more than expected. Having good business credit scores can be your best bet for securing financing options you can afford, or simply keeping your business afloat when the costs pile up or cash flow fluctuates.
What is a business credit score?
Just like personal credit, there are a few big credit reporting agencies collecting information about your business credit. Each agency can have different information on file for the same business, which means they are creating a different business credit report and calculating a different score for your business. Three of the most notable business credit scores are:
Dun and Bradstreet PAYDEX Score, used by suppliers and vendors to determine your payment terms. Scores range from 1 to 100, higher scores indicating better payment performance.
The Intelliscore Plus℠ from Experian, used by lenders to determine the likelihood of delinquency over the next 12 months. Again, scores range from 1 to 100.
FICO® LiquidCredit® Small Business Scoring Service℠, used by the SBA to pre-screen applications for commercial loans under $350,000. Scores range from 0 to 300, where the minimum score to pass the SBA’s pre-qualification is currently 140.
Top tips to improve your business credit scores
It’s tough to add another thing to the list of what you need to take care of as a business owner. Fortunately, taking care of your business credit is similar to taking care of your personal credit. Here are a few things you can do now to keep your business credit reports and scores in check:
Pay bills on time. Pay early if you can! To score a 100/100 on your PAYDEX score, you’ll have to consistently pay early.
Open multiple credit accounts, such as a business credit card, a line of credit, or loan. Use only your business accounts for your business expenses to ensure that you keep your business and personal finances separate, and try to keep your balances under 25% of the available credit line.
Maintain good relationships with your suppliers and vendors, and check to see if they report to business credit reporting agencies so that your positive payment history is being reflected in your business credit report.
Check your reports for errors or derogatory remarks. 25% of small business owners have reported significant errors on their business credit reports. If you find an error, be sure to request a correction from the reporting agency.
Gerri Detweiler is Head of Market Education for Nav, which provides business owners with simple tools to build strong business credit. Her articles have been widely syndicated, and she writes a column for Money.com. She is also the coauthor of Finance Your Own Business: Get on the Financing Fast Track.
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