A business credit score tells credit agencies, loan providers, and vendors or distributors how trustworthy you are when it comes to borrowing funds. A higher business credit score, like a higher personal credit score, indicates to potential creditors that your small business is more creditworthy.
What is a Business Credit Score?
A business credit score, also known as a commercial credit score, helps creditors decide if a business is a good candidate for a loan. It’s calculated by credit scoring firms based on:
- Existing credit obligations
- Repayment histories with lenders and suppliers
- Any legal filings such as tax liens, judgments, or bankruptcies
- How long the company has been in business
- Business size and type
- Repayment reliability compared to similar businesses
Why is it Important to Establish a Good Business Credit Score?
Business credit scores and FICO scores are key considerations for lenders when taking on new customers. Without a business credit score, you’ll likely need a strong personal credit history to qualify for a small business loan.
Suppliers also typically review your business’s credit score before providing terms. A good business credit score can make it easier to negotiate favorable terms in both of these cases.
Advantages of Building Your Business Credit Score
- Easier to access financing
- Lower insurance rates: Insurance rates can be expensive, particularly for a growing business. A solid business credit score might help your small business get lower rates.
- Separate your personal and business finances: A business credit score can help you get credit for your small business without relying on your personal credit. It can also be beneficial when it’s time to file your taxes each year.
The United States tax system requires you to keep your personal and business finances separate if you plan to deduct expenses. This separation can help ensure that your personal assets aren’t used against you if your small business runs into financial difficulties.
What Affects a Business’s Credit Score?
- Assets: If your business owns assets, such as commercial real estate, this will most likely improve its credit score.
- Outstanding debts: What current loans and credit cards do you have? If you use credit wisely and pay it off on time, this can improve your business’s score and make it more likely that your loan application is approved.
- Time in business: Being in business for several months or years can help you raise your business’s score.
- Revenue: The amount of money your small business makes annually can have a positive effect on its credit score.
- Industry risk: Some industries, such as pubs and restaurants, have a longer track record of risk than others, so lenders may view them differently based on historical data.
- Public records: These include UCC filings and other reports, such as liens and judgments filed against you.
- Credit history for both your personal and business loans: How long have you had personal and commercial credit? What loans have you had in the past, how much were they worth, and how quickly did you pay them off? If your business has some history that shows your responsibility with debt payments, this can improve its credit score and make it more appealing to lenders.
How to Raise Your Business Credit Score
The steps to enhancing your business credit score are similar to those of improving your personal credit score. To get started:
- Use credit responsibly and regularly: Utilize your business credit as much as possible. As you borrow money and pay it back on time and on good terms, you’ll gradually build business credit.
- Establish business credit that will show up on your report: Remember that not all creditors report all of your credit accounts. Applying for a business credit card is a good starting point for building business credit.
- Pay your business expenses on time: Your payment history will probably have the greatest impact on your business credit score. This means that paying all of your business expenses and bills on or ahead of time is essential.
- Keep track of your business credit score
- Avoid maxing out your business credit: Experian suggests keeping your credit utilization on business credit cards and other lines of credit below 30%.
As you acquire debts to build your business credit, remember that these debts are a path to business growth. By taking on the right debt and managing it wisely, your small business can improve its credit score and start its journey to the next level.