Business Banking

Guide to business credit scores

In this guide, we address all the questions you may have about your business credit score and how to build it.

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As an entrepreneur, establishing a good business credit score for your company is critically important. Lenders and vendors often run a business credit check before approving credit applications. If your company has a good score, you’ll find it easier to access and qualify for a variety of credit facilities.

Not only that, but you’ll also get favorable terms for those credit facilities – including lower interest rates and longer repayment periods. Besides, a strong business credit score may help your company to qualify for loans without your personal credit score. This is particularly important if your personal credit history is less-than-perfect or if you want to keep your business and personal finances separate.

The bottom line is, a healthy business credit score is essential to accessing credit and building a successful business. In this guide, we address all the questions you may have about your business credit score and how to build it.

What is a business credit score?

A business credit score is a number that expresses the diligence of a company in paying its debts. It essentially indicates whether or not the business is a good candidate for receiving loans and other credit facilities.

The higher the business credit score, the higher the creditworthiness. This increases the likelihood of getting approved for funding. On the other hand, lower scores put the business at risk of being denied loans and credits. The low score basically indicates poor debt management, which makes the business a high-risk borrower (from the perspective of lenders).

How does a business credit score differ from a personal credit score?

The main difference between business credit scores and personal credit scores is that while business credit is strictly for companies, personal credit is entirely for individuals. As a small business owner, the credit score of your business is not even related to your personal score. That’s because business credit bureaus collect completely different information from personal credit agencies.

That said, if you take business loans using your personal credit, then business debts will certainly affect your personal credit score – and not necessarily in a good way. That’s precisely why it’s recommended that you separate business credit from personal credit. Below are more differences between personal and business credit scores:

  • Identification numbers: while your personal credit score is attached to your Social Security Number (SSN), your company’s credit score is linked to its Employer Identification Number (EIN). A business EIN is a unique, nine-digit number given to the business by the IRS for identification and tax purposes. Think of it as a Social Security Number, but for the business.
  • Reporting agencies: the three main credit bureaus for business credit scores are Dun & Bradstreet (D&B), Experian Business, and Equifax Business. Most lenders use the standards developed by these three credit agencies to rate businesses. However, you may need to apply to these agencies for them to start tracking you. D&B, for example, uses its D-U-N-S number system to track and rate companies. While not as common as the other three, FICO SBSS is yet another alternative credit bureau for businesses – specifically small businesses. Meanwhile, the main consumer credit bureaus are Experian, TransUnion, and Equifax – all of which use the FICO scoring system.
  • Scores range: business credit scores range from 0 to 100, except for FICO SBSS which ranges from 0 to 300. On the other hand, personal credit scores range from 300 to 850.
  • Access: unlike personal credit scores, which are not available to the public, business credit scores are available to anyone. Whoever is interested can go to any or all the credit bureaus and pull your business’s credit score, albeit at a small fee.

How to build business credit without using personal credit

Your business and personal credit reports collect different types of information. As such, they do not impact each other unless you apply for business loans using personal credit. In which case, the activities of your business with regards to that loan will impact your personal credit score.

That’s never a good idea because in case of any defaults or delays in payments, both your business and personal credits will be hurt. Instead, consider building your business’s credit score without using your personal credit. That way, the business will qualify for loans, credit cards and lines of credit without relying on your personal credit. Here are the steps to take in order to build business credit without using personal credit:

Step 1: Incorporate your business

Incorporating a business or forming a limited liability company (LLC) makes it a separate legal entity from you the owner. The same can’t be said for a sole proprietorship or partnership where you can’t distinguish yourself from the business. As long as you and the business are a single entity, you’ll always be required to personally guarantee all business loans, which binds your business and personal credits.

But if you incorporate the business, you can detach your personal credit score as well as Social Security number when taking out business loans, credit cards and lines of credit. This not only prevents you from personal liability, but it also establishes your business as a separate entity with its own credit database.

Step 2: Get a business EIN

An Employer Identification Number or Tax Identification Number is a unique, 9-digit number that the IRS gives to companies for identification and tax purposes. It is completely free.

While you’re not legally required to have an EIN if you own a single-member LLCs or sole proprietorship, it’s recommended that you get one anyway. It identifies your business as a separate entity from you. And in doing so, the EIN distinguishes your company’s credit from your personal credit.

You can therefore apply for business loans and credit facilities using the EIN, and not your SSN. This helps to build the business credit score without using or impacting your personal credit history.

Step 3: Register your business with Dun & Bradstreet

Dun & Bradstreet (D&B) is one of the three major credit bureaus for small business credit scores (along with Experian and Equifax). In addition to providing commercial data and analytics for businesses, D&B also assigns companies with the Data Universal Numbering System (D-U-N-S) number.

The 9-digit number is completely free to get and it establishes your business’s PayDex score – the equivalent of FICO scores, but for businesses. Creditors will use the D-U-N-S number to identify your company when running a business credit check. This effectively keeps your SSN and personal credit away from business debts. Keep in mind that the better you handle business debts, the higher your company’s PayDex score.

Step 4: Separate business finance from personal finance

Separating business finance from personal finance gives you limited liability. In other words, you won’t lose personal assets when you default business debts. Furthermore, business and personal transactions won’t mix, which gives you a foundation for building business credit score without using personal credit.

The easiest way to separate business finance from personal finance is by opening a dedicated checking account for the business. This is where all business transactions will flow through. Make sure that the account is under the business’s legal name and EIN to add some more distance between you the person and your business.

Step 5: Pay business debts on time

Just like personal credit, taking out business loans and repaying them on a timely basis will improve your business credit score. Better yet, make payments before their due date. That will build business credit faster than making payments when they are due.

The opposite is true – defaults and late payments will greatly hurt your business credit score. To compound the problem of lateness, business creditors and vendors don’t typically offer 30-day grace periods as is the case with personal creditors. Therefore, to build business credit, it’s paramount that you stay on top of your loan repayments as well as business credit card and lines of credit payments.

Step 6: Establish tradelines

A tradeline is an agreement between your business and a vendor, whereby the vendor allows your business to take products on credit. You can establish tradelines with suppliers of inventory, stationary, transport services etc. The vendor may give you a week or month before you have to start making payments.

Some lenders who offer tradelines often report to business credit bureaus. They may include information such as the amount of the tradeline, its due date, how quickly you pay back, your available credit etc. Discipline in repayments boosts your business credit score. This makes tradelines just as important as loans, business credit cards, and lines of credit when it comes to building business credit.

Step 7: Request your vendors to report credit activity to credit bureaus

Not all vendors report credit activities to credit bureaus. Those who don’t report your credit lines won’t help you build business credit. Therefore, take the initiative of requesting them to report your payment activities to business credit agencies. This will improve your business credit score, particularly if you’re handling business trade lines in a diligent way.

How are business credit scores used?

Small business lenders and creditors rely on business credit scores when deciding whether or not to approve business loans and other forms of credit. To them, the higher your business credit score, the more you’re likely to pay off business debts on time. This increases your chances of getting approved.

Your business credit score also comes into play when the creditor is trying to determine the size of loan to approve. Lenders will look at your payment history, credit utilization, previous bankruptcies etc. to determine your creditworthiness. Such information, paired with your business revenue, will influence their decision on the amount of loan to grant your business.

Keep in mind that your business credit history will follow you from one business to another. Even if you start a new business, the creditworthiness of the previous one – including all your payment history – will affect the new business. This is why you want to get business credit right from the get go.

What credit score do you need for a business loan?

The credit score you need to qualify for a business loan varies depending on the lender and type of loan you’re applying for. Generally, most lenders will require a PayDex score of 75 or more to approve your business for loans. Those who use the FICO SBSS often ask for 140 or higher. In fact, if your FICO SBSS is 140 or more, then you may pre-qualify for some of the best small business loans – including SBA 7(a) and SBA 504.

That said, some business loans – including short-term business loans and merchant cash advances – have less stringent credit score requirements. You may qualify with a PayDex score of 50. Oftentimes invoice financing won’t trigger a business credit check at all. These are options to explore if your business doesn’t have a decent credit score or if you haven’t had enough time to build business credit.

It’s not uncommon for lenders to also check your personal credit score before approving loan applications. SBA loans and term loans from traditional banks are the hardest to qualify for and require a personal credit score of 680 or higher. You can qualify for a business credit card or various lines of credit with 600. Short-term loans and merchant cash advances require at least 500 while invoice financing rarely prompts a credit check.

Building good business credit

Whether you’re setting up shop or already running your company, establishing a good business credit score comes with a number of benefits. In addition to taking out loans at lower rates and better terms, a good credit will earn you lower insurance premiums. Besides, building good business credit enables your company to qualify for loans without you having to sign a personal guarantee. These are all things that you can leverage upon to access affordable credit and grow your business.

To build good business credit, it’s important to understand how it works and the factors that play a part in ultimately determining your business’s credit score. Most of these factors are within your control, and you can use them to build business credit fast.

What factors affect a business credit score?

Business credit bureaus generally pay close attention to your efforts to improve your business credit score. They’ll look at whether or not you pay your bills on time. Applying for (and using) business credit cards will also help you a great deal. The same goes for business lines of credit. In the case of credit cards and lines of credit, they’ll pay attention to whether or not you pay them off on time.

Alongside your financial diligence, credit bureaus also look at the stability of your business. This specifically relates to your ability to grow business revenues and profits. Put together, all these things affect the credit profile of your company. Here’s a more detailed breakdown of factors that affect a business credit score:

  • Current debts: do you have any outstanding company debts? These include loans, business credit cards and lines of credit. Having debt in itself is not beneficial, but using the debt responsibly and then paying it off on time will boost your business credit score. In the case of revolving credit (like credit cards and lines of credit), your credit utilization rate will also come into play. Also known as credit utilization ratio, this rate refers to the proportion of allocated credit that you actually use. You’ll want to keep your business credit utilization rate to under 30% for you to earn a good business credit score.
  • Loan and credit history: when credit bureaus examine your loan and credit history, they’ll look at your business as well as personal credit histories. Specifically, your score will be determined by the types of loans you’ve had in the past and how long you took to pay them off. A good payment history indicates good creditworthiness, which in turn leads to a good business credit score.
  • Time in business: your longevity in business contributes to your business credit score. The longer you’ve been in business, the better the score. If you’re just starting out in business, there’s every chance that your credit score will be low. This is not within your control, so just focus on good debt management. Your business credit score will pick up in a year or so.
  • Business revenue: your business credit score is a function of annual revenue. Credit bureaus use your revenue to determine things like cash flow and debt-to-income ratio – both of which are critically important to your ability to service debts. Generally, the more the revenue, the higher your business credit score.
  • Business assets: if your company owns assets like property and equipment, then your business credit score is likely to rise. Credit bureaus see this as a sign that your assets can be sold to recover debts should your business default on them.
  • Industry risk: lenders consider certain industries, like restaurants and bars, as riskier than others. If your business is in such an industry, you’ll need to work harder in revenue, assets and payment history in order to raise your business credit.
  • Public records: liens, judgements against your business, UCC filings and bankruptcies are all public records that affect your business credit score. Negative rep will certainly lower the score while positive rep will raise it.

What is a good business credit score?

A majority of small business lenders prefer a business credit score of 75 and above. This is if you’re basing on the Dun & Bradstreet, Experian, and Equifax scores range that max out at 100. If the score is based on FICO SBSS, then most lenders will like to see a 140 and above.

That said, it’s not a one-fits-all case. Every lender has their own credit score requirements, which often vary based on the type of loan you’re applying for. In fact, some will also refer to your personal credit before advancing loans to your company. Most conventional lenders rarely approve loans to business owners with personal credit scores that dip below 500, regardless of their business credit scores.

How to build business credit

Business credit scores are given to companies by credit bureaus, which means that you can’t directly change your score. However, you can take measures and put in some work to improve it over time. Here are 5 ways to build business credit:

1. Incorporate the business or form an LLC

A limited liability company (LLC) or incorporated business separates your business from you (the owner), thus establishing business credit. This allows you to get a federal Employer Identification Number (EIN), which reporting agencies will use to track your credit record. Without the EIN, credit bureaus will use your Social Security Number (SSN) and that will shift business credit records to your personal credit score.

2. Take on debt

The best way to build business credit fast is by getting debt – specifically business credit cards and lines of credit. Credit bureaus want to see a record of your business taking on debt and repaying it in full. They’ll look at the total number of cards you take, the number of credit lines, your payment history and how quickly you pay off these revolving debts.

3. Get tradelines from vendors who report to credit bureaus

It won’t help your business much if you’re staying disciplined with debt, but the creditor isn’t reporting your payment history to credit bureaus. Most loan lenders will report to credit agencies, but some vendors won’t. Therefore, before taking up a tradeline, make sure to ask the vendor if they report credit activities to agencies. Consider prioritizing those who do when picking suppliers.

4. Pay debts before their due dates

You’ll get a good credit score when you pay loans, credit cards, lines of credit and tradelines on time. But you’ll get an even better score when you pay earlier. For example, Dun & Bradstreet award the highest scores to companies that pay debts 30 days before they are due. Additionally, keep your credit utilization rate below 30%.

5. Regularly check your business credit score

Up to 34% of credit reports have at least one error. Such errors can ultimately affect your business credit score. To ensure that doesn’t happen, check your scores regularly. All the three major credit bureaus – Equifax, Experian and Dun & Bradstreet – charge a small fee to pull your business credit report. But it’s worth paying just to make sure that all information is accurate.

How long does it take to build business credit?

The common belief is that it takes three years to build business credit. However, you can do it in one year. Once you’ve incorporated your business, take on affordable revolving debt, apply for tradelines, and pay those debts earlier than their due dates. These seemingly simple steps will help you build business credit in a year or less.

As is the case with personal credit scores, your business credit score will stay with you forever. You want to make sure it’s good from the beginning. Avoid taking on too much debt, missing payments or using more than 30% of the revolving credit that’s available to your business. All these things will send red flags to credit bureaus. Similarly, regular restructurings, frequent changes in business ownership, switching banks, and late filings of taxes will hurt your business credit score.

Understanding business credit reporting

Business credit reports are generated by credit bureaus. Also known as credit reporting agencies, these firms are at the center of business credit reporting. So, who are they and what do you need to know about them? We cover all that and more in the next sections.

How business credit reporting works

As already mentioned, business credit reports are generated by credit bureaus. Credit bureaus or credit reporting agencies are organizations that research and collect credit information on individuals and businesses. They sell this information to lenders, who then use it as a measure of creditworthiness.

There are three main business credit reporting agencies: Dun & Bradstreet, Experian, and Equifax. Of the three, nearly all business lenders and creditors rely on credit reports by Dun & Bradstreet (D&B) when deciding whether or not to grant your business credit. You, however, need to register with D&B for them to start tracking your company. Upon registration, you’ll get a Data Universal Numbering System (DUNS) number. This is a unique, 9-digit number that identifies your business.

The credit score generated by Dun & Bradstreet is known as a PayDex score, and it ranges from 0 to 100. The higher your company’s PayDex score, the more your creditworthiness. So, what is a good PayDex score? D&B classifies credit as either bad, fair or good, with good tending towards 100.

Bad business credit starts from 0 to 49. A score within this range implies that you typically delay debt payments by 60 days or more. If your score falls between 50 and 79, then you have fair business credit. This implies that you delay debt payments by 15 to 30 days.

A good business credit score lies between 80 and 100. If your business score is good, it means that you either pay your business debts on time or up to 30 days earlier than they are due.

Alongside your debt payment history, Dun & Bradstreet collects lots of other information about your company. They get this information from public records, other companies that work with your company, and from your own company. The information included in a D&B report includes:

  • Biographical information. This includes your DUNS number, phone, and address.
  • Business registration details, such as your company’s main location and places of business.
  • An executive summary that contains the year your company started, working capital, number of employees, net worth and annual revenues.
  • Your D&B rating and D&B PayDex score.
  • Your viability ratings, which are basically calculations that rate your business based on things like risk and comparison with other similar businesses.
  • Business history. This section covers ownership – including any previous and existing owners – as well as personal data of the owners and key executives.
  • Government Activity Summary, which contains all publicly available information from the federal government about your company.
  • Operations data that includes information about your industry, your business locations and your facilities.
  • Your Standard Industry Classification (SIC) and North American Industry Classification (NAICS) codes.
  • A tree diagram of all your company linkages, complete with the parent company and subsidiaries.
  • Detailed financial statements.
  • Comparative financial statements as well as key business ratios such as the current ratio, quick ratio and return on sales.
  • Public filings relating to judgements, liens, bankruptcies, Uniform Commercial Code (UCC) and other publicly available records.

Although not nearly as extensive as a D&B credit report, Equifax, Experian and FICO also have their rating and reporting systems. Some lenders will use these reports as well when deciding whether or not you’re a diligent creditor.

The FICO Small Business Scoring Service (FICO SBSS) is especially important when you’re applying for SBA loans. Most lenders use it (in place of or alongside the D&B PayDex) to determine your eligibility for SBA loans. The main difference between D&B PayDex and FICO SBSS is that the latter ranges from 0 to 350 while the PayDex score maxes out at 100. Oftentimes you’ll only qualify for SBA loans if your FICO SBSS is 140 or above. If it’s below 140, then you may not even pass the pre-qualification phase.

Where can you check your business credit score for free?

If you own the business for which you’re trying to check its credit score, you can request a copy of the D&B report for free by calling 1.800.333.0505.

Equifax offers one free monthly credit report that you can get right from their website. Any subsequent reports will cost you $99.95 or $399.95 for a pack of five.

To get your company’s Experian business credit report, head over to their website and fill in the request form. You’ll need to pay $39.95 for the service.

How to dispute credit report errors

After knowing how to check a business credit score, the next important thing is knowing how to dispute errors. This is important because up to 34% of credit reports usually have at least one error. There are many potential sources of such errors.

For example, a creditor may report inaccurate information or your business credit information could get mixed up with that of another. Whatever the case, inaccuracies and errors can hurt your credit score, particularly if they are negative.

To dispute these errors, contact the credit bureaus directly and report the issue. They will make the necessary corrections and report your correct business credit score.

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