A healthy business credit score determines your company’s creditworthiness. Like your personal credit score, it can also help you discover new opportunities and impact access to contracts, business loans, and other financial aspects.
Your business credit score will often give loan issuers, vendors, and credit agencies an idea of your trustworthiness. A solid or high business credit score tells interested parties that you are creditworthy and reliable.
What Is a Business Credit Score?
A business credit score is generated using information from a report which includes historical data about your business, such as payment history, amounts owed, account information, and more. It starts when you acquire an Employee Identification Number to file taxes for your business.
Your business score typically does not fall in the numerical range of a personal credit score. Business credit scores rank from 0 to 100, with businesses in the FICO Small Business Scoring Service ranking from 1 to 300. Your business credit score determines whether or not you can get funding.
The Small Business Administration, suppliers, and banks also rely heavily on this number to issue credit and establish extended payment terms.
How Your Business Credit Score Is Calculated
Business credit agencies collect payment information from suppliers, vendors, and banks, as well as credit card issuers and trade associations that gather data. Some factors that are used to calculate your score include
- Payment history
- The size of your company and its age
- Credit utilization
- The oldest financial account
- Established trade lines
- Risk of failure in your sector
Understanding Your Business Credit Score
It is important to establish a good credit score because:
- Suppliers will often use it to determine your creditworthiness
- Banks rely on your business credit score to establish credit lines
- If you do not have a solid business score, your personal credit score may be used to determine how much you can access in small business loans
It often takes some time before establishing a reliable business credit score, with some businesses taking up to two years. Hence, it is also important to note that you cannot directly influence your business credit score as it is determined by external rating agencies.
Business credit scores can also be used to acquire new contracts. Often, bigger companies look at your credit score before interacting with your business. Supplies may also give you better rates based on your Paydex score.
Factors Affecting Your Business Credit Score
While external agencies determine your credit score, several factors play a critical role. For instance, your company’s payment history is an important factor that demonstrates its reliability to lenders and suppliers.
Financial data from previous lenders, vendors, and suppliers can also be used to determine your credit score. This includes information such as the company size, current outstanding debt, credit utilization, and credit history, among others.
If you share a business name with another company, it can also significantly affect your business score. External parties interested in interacting with your business often look through a large database to find matching records.
However, it is not uncommon to have businesses with similar names appearing in the database. Even if your business makes all payments on time, if a company with a similar name makes late payments or defaults, your business credit score can take a hit.
You must monitor your business credit score with the help of a professional credit expert.
How To Check your Business Credit Score
There are several companies that report business credit, such as Experian, Equifax, and Dun & Bradstreet. Some of these companies send your report by email or post, and others through an online account.
The information in your credit file comes from several sources including the Companies House and Registry Trust, which also contains information about County Court Judgements.
Typically, businesses do not have a single definitive credit score because each credit bureau has distinctive scoring systems and methods which produce varying results. Lenders use reports from different companies to check your credit score.
Generally, the higher your business credit score, the better for your business. However, there are some variations.
Dun & Bradstreet Business Credit Scores
This company uses the delinquency score, failure score, and Paydex score.
- Paydex Score: Is measured from 1 – 100 with 80 and higher being lower risk, 50- 79 moderate risk, and lower scores indicating high risk of delayed payment.
- Failure Score: Is measured from 1,001 to 1,875 with lower scores indicating high risk of bankruptcy or closure within a year.
- Delinquency Score: is measured from 1 to 5 with lower scores indicating lower risk for delayed payment or bankruptcy.
Equifax Business Credit Score
Equifax offers three assessments:
- Payment Index: Is measured from 0 to 100 and reflects payment history. Higher scores of 90 or more indicate prompt payment.
- Credit Risk Score: Is measured from 101 to 992 and used to assess delinquent payments. Higher scores translate to lower risk.
- Business Failure Score: Is measured from 1,000 to 1,880 and used to assess the likelihood of business closure. Lower scores equal a higher probability of failure.
Experian Business Credit Score
This company’s Credit Score report includes a financial stability risk and business score rating with information such as account histories, payment trends, and public records.
- Business Credit Score: Is measured from 1 to 100 with higher scores indicating lower risk of serious payment delinquencies.
- Financial Stability Risk Rating: Is measured from 1 to 5 with lower scores representing a low risk of payment default and bankruptcy within a year.
Why You Need a Business Credit Score
There are various advantages of having a business credit score, such as:
- Better rates on business loans: A good business credit score boosts your chances of getting better rates on your loans.
- Lower business insurance premiums: Business insurance rates increase as your business grows. Higher business credit scores can help you lower your rates.
- Improved payment terms with suppliers and vendors: Trade credit terms are the duration you have between receiving goods and making payment to your vendor. These terms can range from 1 – 3 months and are usually determined by your business credit score.
Summary
It is important to check your business credit score often to ensure that all details are correct. While credit score companies scrutinize all information, it is still possible to find some details missing. Be sure to check with a credit bureau to find out your business credit score.