Business Credit Scores: Everything You Need to Know

May 13, 2022

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 you are more creditworthy. If you own a business and want to build strong business credit, continue reading to learn more.

What Is a Business Credit Score?

A business credit score is a number that shows whether a business is a good candidate for a loan or to become a business customer. Business credit scores, also known as commercial credit scores, are calculated by credit scoring firms, based on:

  • Company’s 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 Performance Relative to That of Similar Companies.

Why Is It Important to Establish a Good Business Credit Score?

  • Banks put a high priority on business credit scores and FICO scores when establishing credit lines.
  • Suppliers frequently examine your company’s credit score before providing terms, and having good credit makes it a lot easier to negotiate favorable terms with them.
  • In the absence of a business credit score, a very good personal credit history is required to qualify for a small business loan based solely on your personal credit.

The Advantages of a Business Credit Score

Small business owners can benefit from building a good business credit score in several different ways such as:

It Is Easier to Access Financing

A strong business credit score can help you get lower interest rates on business loans. If you take out a business loan, you will not be required to sign a personal guarantee, which makes you personally liable.

Possibly Lower Insurance Rates

Insurance rates can be extremely expensive, particularly for a growing company. A solid business credit score, however, may assist your company in obtaining low rates.

Separate Your Personal and Business Finances

Having a business credit score can assist you in obtaining credit for your company without relying on your personal credit. It can also be extremely useful when it comes time to file your taxes each year.

Because the United States tax system requires you to keep your personal and business finances separate if you plan to deduct expenses, this separation can also help ensure that your personal assets aren’t used against you if your company runs into financial difficulties.

What Are the Factors Affecting a Business’ Credit Score?

Assets – What assets does the company own? If you have some assets, such as commercial real estate, this will most likely improve your credit score.

Outstanding debts – What current loans and credit cards do you have? If you use credit wisely and pay it off on time, it will improve your credit score and make it more likely that you will be approved for a loan if you apply for one.

Longevity – How long have you been in operation? If you’ve been in business for several months or years, that will help you raise your score.

Revenues – How much money do you make each year? If your company is making money, it may have a positive effect on your credit score.

Industry Risk – Some industries, such as pubs and restaurants, have a longer track record of risk than others, and lenders view them differently based on historical data.

Public Records – 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 you have some history that shows your proclivity to repay loans in the future, this can affect your credit score while also making you more appealing to lenders.

How Are Business Credit Scores Calculated?

The most essential factor that contributes to your business credit score, just like your personal credit score, is your payment history—whether you make adequate on-time payments on your debts. Business credit scores take into account the age of your company, and the longer you’ve been in business, the greater your score.

Debt and debt usage are also factors in determining a business credit score, as is the industry you’re in and the size of your company.

How to Raise Your Business Credit Score

Enhancing your business credit score entails many of the same steps as improving your personal credit score. If you want to have the ideal business credit score possible, make the following changes immediately:

Use Credit Responsibly and Regularly

Utilize your business credit as much as possible, and keep in mind that as you borrow money and pay it back on time and good terms, you will gradually build business credit.

Create Business Credit Types That Report Trades

Remember that not all commercial creditors report trade lines and lines of credit. Applying for a business credit card is a good starting point if you need to begin building business credit.

Pay Your Business Expenses on Time

Your payment history will most likely have the greatest impact on your business credit score. As a result, you should pay all of your business expenses and bills on time or ahead of time.

Keep Track of Your Business Credit Score

Similar to how you should keep an eye on your personal credit score over time, you must also keep track of your business credit score for changes or updates.

Avoid Maxing Out Your Business Credit

For the best results, Experian suggests keeping your credit utilization on business credit cards and other lines of credit below 30%.

When it comes to building a strong business, establishing good business credit is crucial. Lendistry combines the speed and convenience of technology, the knowledge and guidance of responsible lending, and the investment capital of social impactors and national banks. Contact us today for more information.