Margins, ratios, and other benchmarks provide valuable insights into a company’s financial health. While successful business owners rightfully focus on such key performance indicators, there’s another figure that’s also worth tracking – business credit scores. A strong business credit score can become a powerful ally, opening doors to coveted opportunities and financial flexibility. But understanding the basics of this essential business metric isn’t always easy.
What is a business credit score?
A business credit score is a numerical representation of a company's financial creditworthiness. It represents a company’s ability to repay debts and manage credit obligations responsibly. Similar to personal credit scores, you will have different scores based on the entity calculating the score and the scoring model used. Most, if not all, scoring models consider payment history and credit usage when calculating the score. However, business scores uniquely consider business size, age, and industry risk.
How are business credit scores calculated?
Before your score can be calculated, you must exist as a legal business entity. Usually, this includes obtaining a federal tax ID number. As you apply for credit and make payments on borrowed funds, your credit activity is reported to at least one of the three main business credit bureaus: Dun & Bradstreet, Equifax® and Experian®. Each bureau uses their own scoring models and ranges to calculate scores, which can lead to three different credit scores. Having said that, these scores are generally similar and if there is a huge discrepancy between them, it is recommended to look further into it.
When calculating a business credit score, the most weight is given to payment history and credit utilization, generally accounting for about 35% and 30% of the score, respectively. Business size is assessed through metrics like employee count and revenue, which reflect the company's scale and financial stability. Established businesses, especially those operating for over ten years, are often viewed as having a mature credit profile.
Generally, a business credit score of 80-100 is excellent, 50-79 is good, and below 50 is considered poor.
Additionally, a personal credit score plays a crucial role, particularly for small business owners applying for business credit cards, as it helps issuers evaluate the credit management behavior of the individuals behind the business. This understanding is vital for effectively securing and utilizing business credit cards.
Where can a business find their credit score?
You can buy business credit reports that include your scores from Dun & Bradstreet, Experian, Equifax, or through credit monitoring services. Dun & Bradstreet also offers limited access to your scores at no cost.
How can a business improve its credit score?
Maintaining a positive credit history and demonstrating responsible credit management practices is the best way to improve your business credit score. Here are a few practical ways to do just that.
- Focus on paying all bills on time, including utility bills, supplier invoices, and loan payments. Late or delinquent payments lower your score.
- Keep credit utilization low by using only a small portion of your available credit limit. High usage might give the perception that you’re financially overextended.
- Do not close old accounts since they reflect a longer credit history, which is preferable.
- Dispute errors on credit reports. Removing inaccurate or outdated data can raise your credit score.
- Build a mix of credit types like business credit cards, trade lines and business loans. The variety shows your ability to manage different forms of credit.
Remember that a higher score won’t appear overnight. Substantial improvements to an existing business credit score may take up to 12 months. New businesses may take up to 24 months to establish a good credit score.
Business Credit Score Best Practices
Creating processes that put good credit habits on autopilot could help you establish and maintain a good credit score with minimal effort. Consider adopting these best practices for maintaining a good credit score.
- Set up due date reminders or automatic payments to ensure bills are paid on time.
- Review business credit reports from each credit bureau at least monthly to ensure they remain error-free.
- Sign up for credit alerts so you’re notified of changes to your score and new credit inquiries on your reports.
Understanding business credit score basics and exercising smart borrowing habits are essential for good financial health and long-term success.
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