Just about everyone in business knows about personal credit scores, but fewer business owners know they have a business credit score as well. And, like personal scores, business credit scores can have a significant impact on the availability of credit, as well as other important matters.
"Like a personal credit score, a business credit score provides a quick view of risk potential based on where the score falls on the scale – the higher the score, the lower the risk," explains Karim Chehade, director of product management for small business with Experian, one of the credit reporting agencies that provide business credit scores.
Lenders, including banks, use business credit scores to evaluate the creditworthiness of a business applying for credit. Your business's score, which on the scale Experian uses ranges from 1 to 100, may affect whether you can get a loan, line of credit, or credit card, as well as the amount you can borrow and what it costs you.
How Your Business Credit Score Is Used
"The first thing financial institutions are looking at is the credit score," says Azra Daniel, a vice president and small business banking manager with First Horizon Bank. Your credit score alone won't determine your access to credit, she adds. Experienced lenders consider a range of factors in deciding whether and how to extend credit, including the type of business, management approach, and the business credit score.
Business credit scores may also be used to evaluate your firm by vendors, potential partners, and some customers, such as large retailers, according to Gerri Detweiler, director of education for Nav, an online source of information on business credit, including scores generated by credit reporting agencies. Even business insurance companies may check business credit scores before providing coverage. "It can come into play in a lot of different ways that can affect your business directly or indirectly," Detweiler says.
What Makes Up Your Business Credit Score
The business credit score is calculated from information in your business credit report. Along with Experian, Dun & Bradstreet, Equifax, and FICO® are the major providers of business credit reports and scores.
The main ingredient in a business credit score is payment history – whether your business has a record of borrowing money and paying it back on time and in full. This may include information from vendors who extend trade credit, although many vendors do not report to credit bureaus. The report also may include information from credit card companies, collection agencies, and other sources, such as state corporate filings.
Many business owners don't know much or anything about their scores. A 2015 study by Nav found that nearly half of business owners don't even know they have scores. This is despite the fact that around 98% of businesses have at least some form of credit report on file with the major reporting agencies, Detweiler says. Experian, for instance, maintains files on 27 million U.S. businesses, according to Chehade.
First Horizon Bank's Daniel says the survey results match her experience in the field. "They don't know they have a business credit score," she says of many businesses. "They don't even know there's a whole reporting system."
How the Business Credit Score Is Generated
Businesses establish entries in the reporting system used to generate credit scores any time they borrow money and pay it back.
To help establish business credit, Chehade says it's important to use your business name instead of your own name on credit cards and loans. Of course, he adds, you should always pay back loans and other credit on time. This includes trade credit accounts, which should show payments made in accordance with the negotiated terms, such as 30 days or 60 days.
Business credit scores and personal credit scores are similar in some ways. And some business credit scoring systems are calculated in part based on the owner's personal credit score. There are, however, important differences between business and personal credit scores. If a business credit application is rejected, for instance, the business lender doesn't have to provide an explanation of how credit information was used to make the determination, as personal lenders do, Detweiler says.
Lenders and others who use business credit scores pay business credit score providers for access to the information. So the score providers have a vested interest in making sure the information they're selling is accurate. Still, errors can creep in, and they can have a negative impact on credit availability and other areas where the scores have influence.
It Pays to Know Your Business Credit Score
To make sure your score accurately reflects your business's creditworthiness, Detweiler recommends checking your business credit score at least annually and trying to correct any errors. You may be able to fix mistakes such as an incorrect industrial classification by asking the reporting agency for a correction. Other problems, such as a payment wrongly being labeled late, will require contacting creditors and asking them to update the agency's report.
While your business credit score is an important number to know, it's also important to have a relationship with a bank that can see beyond the score. When you apply for business credit, for example, you should be able to talk with your lending officer to explain your business, how you borrow, and how you pay your bills. "Ultimately," says Daniel, "that's what a good banker will want to know."
