Most folks are aware with the concept of personal credit ratings. The industry-leading FICO score and the increasingly essential VantageScore (the two primary personal credit score models) provide lenders and other finance organizations with an indication of how well you manage your debt and whether you are likely to make future payments on time.
In today's rapidly evolving financial landscape, the importance of credit ratings extends far beyond individual consumers. Businesses, from small startups to large corporations, are increasingly scrutinized based on their creditworthiness. This shift reflects the growing complexity of the modern economy, where financial stability and reliability are paramount for successful business operations and partnerships.
Businesses also have credit ratings, and they function similarly to personal credit scores in many ways, though the scoring scale is different. If you own a small business and want to learn more about how business financing works, continue reading.
A business credit score is a financial indicator of how a firm has borrowed and managed credit. When it comes to borrowing habits, past performance is a good predictor of future performance, therefore many banks and other lenders look at corporate credit scores to determine a company's likelihood of returning its loans on time.
The significance of business credit scores has grown exponentially in recent years, particularly in the wake of economic uncertainties and global financial challenges. These scores serve as a crucial tool for lenders, suppliers, and potential business partners to assess the financial health and reliability of a company. In an era where data-driven decision-making is king, a strong business credit score can be the key that unlocks doors to better financing options, favorable supplier terms, and lucrative business opportunities.
Business credit scores differ from personal credit scores.
While business and personal credit ratings have some commonalities, such as their impact on borrowing capacity, they are not completely aligned. Different agencies track both personal and business credit. Business credit bureaus employ a separate scale, often ranging from zero to 100, as opposed to personal credit bureaus' 300 to 850 range.
A company's credit score is also determined by a variety of characteristics, including its size, bill payment speed, and industry.
Finally, your corporate credit score is more widely available than your personal score.
How is your business's credit score calculated?
Business credit scores are based on underlying business credit reports that track loans, credit lines, business credit cards, and other business borrowing activity to assist lenders and business partners in determining the credit risk of the underlying business. Your payment history is the most essential component in calculating your business credit score.
The most prominent company credit score systems employ a scale of zero to 100, with 100 representing the best. However, multiple credit-scoring models are deployed. Some organizations even offer multiple company credit scores from the same source.
A higher business credit score can benefit your business in a variety of ways. Similar to personal credit, it can help you qualify for financing with possibly higher credit limits and lower interest rates. It may also make you eligible for lower business insurance premiums.
It's worth noting that the impact of a strong business credit score extends beyond mere financial benefits. In today's interconnected business world, a high credit score can significantly enhance a company's reputation and credibility. This improved standing can lead to stronger business relationships, increased trust from customers and partners, and even a competitive edge in crowded markets. As such, maintaining a robust business credit score should be viewed not just as a financial necessity, but as a crucial component of a company's overall business strategy and brand image.
What types of business credit scores are available?
Just as there are three credit bureaus that track consumer credit scores, many companies track business credit scores. Here are some of the main business credit score models you may encounter:
Dun & Bradstreet's PAYDEX score is one of the most well-known corporate credit scores. This corporate credit score goes from 0 to 100, with scores above 75 considered excellent. A score of 80 or higher implies that you consistently pay on time or early.
Experian Intelliscore Plus is another zero-to-100 scoring model. Businesses with a score of 50 or more are considered low risk according to this approach.
FICO LiquidCredit: FICO provides the Small Business Scoring Service (SBSS), which employs a scale of 0 to 300. The SBSS score is used by the Small Business Administration (SBA) to approve popular SBA program loans. The SBA demands a score of 140 or higher to meet its lending criteria.
Equifax Payment Index: Behind the scenes, Equifax calculates several business credit scores to produce a risk score ranging from zero to 100. This is based on several credit rating factors. A score of 90 or higher indicates that the company consistently pays its invoices on schedule.
How to Find Your Business's Credit Score
Business owners can obtain business credit information through both free and paid services. The major reporting agencies often provide complete company credit reports and ratings for a cost. Free business credit scores may contain more limited information.
Free Business Credit Scores
Nav: Nav provides free business credit scores and reports, with a premium subscription available for more reports. Nav members can obtain scores from Dun & Bradstreet, Experian, Equifax, and FICO.
Dun and Bradstreet: Dun & Bradstreet, one of the most well-known names in company credit, provides you with free access to general and business credit ratings, as well as a selection of PAYDEX, Delinquency Predictor, and Financial Stress scores. However, in order to obtain your score specifics, you must pay.
How to Improve Your Business Credit Score
While practically everything about your personal credit is handled automatically, tracking and improving your company credit may require some additional effort. Here are some crucial guidelines for establishing and maintaining a solid company credit score.
Register your business. If you are concerned about creating business credit, apply for a DUNS number from Dun & Bradstreet and create profiles with other credit bureaus as well. Registering an account with the credit bureaus ensures that they are aware of your company's existence.
Make sure that your credit lines are reported. Whether you have a company credit card or a small business loan, your borrowing and payment activity must be reported to the credit bureaus. If your borrowing has not yet been recorded, services such as Nav's premium can help ensure that your business credit is accurate and contains all activities.
Pay your bills on time or early. With a personal credit score, all you have to do is pay on time to maintain flawless credit. To have a high business credit score, you must pay before the due date.
Maintain revolving balances low: Another similarity with personal credit ratings is the significance of your credit utilization ratio. Maintaining low balances on company credit cards and lines of credit is beneficial to your business credit.
Avoid experimenting with credit: Old accounts with a good payment history are ideal for business credit. Opening or shutting multiple accounts quickly reduces your average credit age and indicates greater risk than a business with solely older accounts.
In the digital age, cybersecurity has become an increasingly important factor in business credit assessments. Credit bureaus and lenders are now considering a company's ability to protect sensitive financial data as part of their risk evaluation. Businesses that implement robust cybersecurity measures and demonstrate a commitment to data protection may see a positive impact on their credit scores. This evolving criterion underscores the need for businesses to stay ahead of technological threats and invest in comprehensive digital security strategies.
Business credit can assist you in obtaining loans to fund development, inventory, seasonal needs, or simply as a backup plan for times when business is not going as smoothly as expected. You don't have to sit back and wait for your company credit to just happen. Take an active role in achieving a great company credit score today.
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