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You may have heard about a business credit score and wondered if you really need to focus on building it. Can’t you just rely on your personal credit score? While you can (and many lenders who require personal guarantees will check your FICO), relying purely on personal credit is not going to offer you all the same advantages.
A business credit score is based on the financial track record of your business, and is tied to your employer identification number (EIN). Business credit reporting agencies analyze a variety of factors, including information in public records (such as liens) to come up with a number that quickly tells lenders, suppliers, and other parties how well your business manages its financial responsibilities. In other words, it demonstrates creditworthiness. When your score is good, you reap the benefits. But what are those benefits, exactly?
Read on to learn:
- 4 ways a good business credit score can help you
- What a “good” business credit score is
- How to find and check your business credit scores
- How to improve your business credit score
Why Is a Good Business Credit Score Important?
A good business credit score is only going to help your business move forward and flourish. It’s a testament to the fact that you pay your bills on time and are financially stable. But how can it help you, exactly? Here are four key ways.
Gain Access to Capital
As a small business owner, there often comes a time when you need to take out a small business loan to take your business to the next level. For example, you may want to purchase expensive equipment, add inventory, hire employees, or open a new location. Unfortunately, approximately, 35% of businesses report that a lack of capital has hindered their ability to grow or expand operations, according to the National Small Business Association (NSBA).
Having a good business credit score can ensure that you won’t be held back by a lack of access to affordable business financing. When the time comes to borrow, lenders will be more likely to approve your application. Further, the better your score and credit profile, the more competitive interest rates and payment terms you’ll be able to get.
Get Better Business Insurance Rates
In addition to giving your business more loan options, a strong business credit can help you land better rates on business insurance. Good credit often correlates with fewer claims, which means a lower level of risk for the insurer. As such, if your business credit is good, you may be able to benefit from a more affordable premium.
Keep Business and Personal Finances Separate
Without business credit, you’ll likely have to lean more heavily on your personal credit history to secure financing for your business. That can mean using personal credit cards and personal loans to cover business expenses. Not only can doing so make it harder to track business expenses, but it can weaken legal protections for corporations and LLCs. For example, an attorney could have better luck going after your personal assets if there’s ever a judgement against your business.
Relying on your personal credit also can limit the amount you can borrow and your financing options (e.g. trade credit). Alternatively, building your business credit allows you to keep your business and personal credit separate so you can make the most out of both.
Impress Interested Parties
A variety of people may be interested in your business credit score, from potential investors and business partners to lenders and vendors.
For example, imagine you are requesting trade credit from a vendor. Before moving forward, the vendor may want to find out how likely you are to meet your credit obligations and pay as planned. In this case, checking your business credit and payment history can give them the answer they need. If you have a good business credit score, you’ll likely enjoy lower interest rates and flexibility (e.g. longer repayment periods or higher credit limits).
As for an investor or potential partner, your business credit score can either instill confidence or be a cause for concern, impacting their future dealings with you. In short, any party can request access to your business credit report at any time, so it’s best to keep it in good shape.
Now that you know a good business credit score can help you, let’s talk about what “good” means, exactly.
What Is a Good Business Credit Score for a Small Business?
Is an 80 a good business credit score? How about 75? Generally, business scores range from 0 to 100 with 0 being very poor and 100 being excellent. To figure out what a “good” business credit score is, let’s look to the traditional credit rating agencies — Experian, Equifax, and Dun & Bradstreet. Plus, we’ll look at how we score business credit at Tillful.
Dun & Bradstreet
Dun & Bradstreet builds a business credit file for your company with a collection of scores and ratings. Their PAYDEX® Score, the main score provided, is designed to show how good your business is at making timely payments (defined by credit obligations paid on time or before their due date). It’s often checked by suppliers, customers, and banks to determine the amount of risk a business presents to them. Scores are broken down into three risk categories:
- Low Risk: 80-100
- Moderate Risk: 50-79
- High Risk: 0-49
In this case, a good score would range from 80 to 100.
Experian’s business score also ranges from a low of 1 to a high of 100. Higher scores mean lower risk, similar to the Dun & Bradstreet model. Here’s how Experian’s Intelliscore PlusSM breaks down risk into ranges:
- Low Risk: 76-100
- Low to Medium Risk: 51-75
- Medium Risk: 26-50
- Medium to High Risk: 11-25
- High Risk: 1-10
In this case, a good score is going to range from 76 to 100.
Equifax also provides business credit reports. The company’s Payment Index shows how likely a business is to pay on time on a scale of 0 to 100 (with 100 being the highest). Scores of 90 or better represent obligations that were paid as agreed so would be considered good.
The company also provides two other scores on their reports, which are:
- The Credit Risk Score ranges from a low of 101 to a high of 992 and is based on factors like credit utilization, company size, account age, and delinquent payments.
- The Business Failure Score ranges from 1,000 to 1,880 and is based on factors like credit utilization, account length, and payment status.
However, the company doesn’t provide categories on what is considered the good range for the latter two scores. That said, the higher the number, the better.
At Tillful, our business credit scoring model also ranges from 0 to 100. We mainly rely on cash flow patterns and transaction data to come up with a score designed to be a window into your business's true financial health. We break down the scoring categories as follows:
- Excellent: 83-100
- Good: 76-82
- Fair: 66-75
- Poor: 52-65
- Very Poor: 0-51
A good score with us is anything from 76 up.
So what is a good score overall? Across all of the scoring agencies, a good score tends to land somewhere between 76 and 90, with an average of about 80.
How to Find and Check Your Business Credit Score
Ready to check your business credit score? You can do so by going to the website of a business credit scoring agency. In most cases, you’ll also need to pay a fee to access your report.
Here’s where you can find your scores:
- Experian: Starts at $39.95 per report
- Equifax: Starts at $99.95
- Dun & Bradstreet: Starts at free (14-day access only)
- Tillful: Always free
It’s hard to say which traditional credit scoring agency is best to check as you never know which one an interested party is going to use. It’s not a bad idea to know where you stand with all three and to work on building business credit with them all!
Tip: You can also keep tabs on your business’s financial health on an ongoing basis for free with Tillful.
How to Improve Your Business Credit Score
To get a good business credit score that shows you are low risk, you need to create a track record of financial responsibility. How? First, borrow money from a financial institution or other lender that reports to a business credit rating agency. Then, manage it well and make your payments on time. This financing could be a business credit card, loan, or line of credit. It’s okay if you can only get a small (or even secured) credit line in the beginning— you’ve gotta start somewhere. If you have a credit line, it’s important to keep your credit utilization rate low (30% is a good reference point).
Another way to build credit is to find vendors that report to the major business credit bureaus. For example, you could open a vendor account with Sam’s Club. Again, you’ll want to make sure you always pay on time or early to create additional positive records. Account age is also a factor in some cases, so it helps to have some history established. Longer histories help to show stability. On the flip side, avoid late payments, overdrafts, and maxed-out accounts at all costs.
Improving your business credit score really comes down to learning a few small habits and ensuring you practice them on an ongoing basis. If you’d like help keeping tabs on the financial health of your business, Tillful’s business credit score service will keep you in the loop and it’s totally free.