A credit score is more than just an indication of your ability to pay bills on time—it is also an important benchmark of financial health. Although personal credit scores are well understood in 2020, business credit can take some business owners by surprise. We understand that building a strong business credit score gives your business greater opportunity for growth, so we’ll cover everything you need to know about your business credit.
What is a business credit score?
What is a credit score and what does it mean to have good credit? Having “good credit’ refers to your ability to secure financing at agreeable terms. Your financial health and trustworthiness is measured by a number of factors that are summarized by a number called your credit score.
Beyond just this number, however, is a credit report that details your financial history and behaviors. Lenders, insurance companies, and other interested parties may consult your credit report to see any outstanding debts, collections, and history of late or on-time payments. Credit reports are generated by business credit bureaus, notably Experian, Equifax, and Dun & Bradstreet.
Just like a personal credit score, you want the highest possible number. A score of 140/300 is a good healthy minimum score that will allow you to acquire financing.
Why is a business credit score important?
Your business credit score signals to economic partners whether it is safe and lucrative to do business with you. A low credit score can hurt your opportunities for partnerships, growth, and beneficial terms on deals and loans.
A strong business credit score can help you:
- Secure financing
- Get better interest rates & loan terms
- Decrease prepayments
- Establish better trade deals within your industry
These factors help businesses save money, improve cash flow, seize opportunities as they come, and grow at a healthy rate. Additionally, establishing a strong business credit score can shift the financial focus from the business owner’s personal credit, which is often used to get a business up and running. A business credit score helps create greater stability and take the pressure from a business owner’s personal score.
What opportunities open up when you have a better business credit score?
A healthy business credit score opens many doors for your business, no matter how long you’ve been in business. Smart business owners understand that it’s well worth the time to establish a strong business credit profile now, before they need it, just so they are ready for whatever the dynamic business world throws at them.
The most important opportunity you’ll enjoy with a good business credit score is the ability to secure financing, especially at short notice. If you suddenly have the opportunity to acquire a better space or location for your company, or a new piece of equipment is released that will substantially benefit your business, a bad credit score could keep you from seizing that opportunity. Instead, a good credit score can help you get loans, lines of credit, favorable terms on financing for large purchases, and much more trust from any seller.
Another opportunity you get with solid business credit is the ability to negotiate deals and trades. With your clean business credit report, you will be able to demonstrate your value to potential partners. Many businesses find that their credit allows them to negotiate favorable terms and establish important relationships with vendors and investors. That’s right–investors are going to be interested in your credit score, so you want to keep them interested with healthy credit.
What are the different types of business credit scores?
It’s important to understand the different types of business credit scores that can impact your business, since focusing on one could lead you to ignore another which is falling.
Personal credit score: While not technically a business credit score, many small and beginning businesses are created using the owner’s personal credit score. The personal credit score can impact the business and is linked until the business is officially separated and established as an LLC.
D&B Paydex score: Dun & Bradstreet is a business credit bureau that ranks your credit as a score 1-100, with special weight given to early payments. You will need a DUNS number to create and access your Paydex score and credit account.
FICO LiquidCredit Small Business Score: The FICO LiquidCredit Small Business Score is a little more favorable than a Paydex score in allowing small businesses to get financing, and it is required by the Small Business Administration for any SBA funding. This score ranges from 0-300 and you’ll need 160 to qualify for most loans.
Experian Intelliscore: Your Experian Intelliscore is focused on your delinquency risk. It takes into account the last 12 months of payments, debts, inquiries, financial ratios, and more, to determine how likely you are to default. Like Paydex, this score is 1-100 with 1 being a serious risk and 100 being no risk.
How do you improve your business credit score?
Now that you understand the importance of business credit, you may want to begin your campaign for improving it. There are short term and long term steps you should take to make your business credit soar, and we think you should implement them all, where possible. Let’s get started.
Establishing credit for the first time
If you’re a small business owner who started your operation using your personal credit score–you’re not alone. It’s a common and useful beginning for small businesses, but it’s time to begin building business credit history in the name of your company.
- Make your business official: It’s time for a business name, dedicated phone number, business bank account, and credit profile. This means getting a phone number that is not an owner’s personal phone and registering it with the directory in your city, county, or state. Open a business bank account in your company’s name and begin using it to pay bills and vendors.
- Get a business credit card: Your credit file is initiated once you open a line of credit. For most businesses, the quickest and most useful way to achieve this step is to get a business credit card. Start with one, and consider adding one or two more as your need grows. You should always keep a manageable balance on the card and never miss a payment.
- Work with reporting suppliers: Not all suppliers and vendors are required to report payment histories to a credit bureau. Choosing to work with a supplier or vendor who does report these payment histories can help to establish business credit.
- Get incorporated: Transitioning your business to an LLC helps to separate personal credit from your business credit. This can simultaneously improve both scores and protect you and your business.
- Pay on time: It’s far too easy to fall behind on payments, or to accidentally pay a day late. Unfortunately those mistakes can injure your credit. Create processes that allow you to pay on time, no matter what.
- Monitor your credit: Once your credit file has been created, you need to watch it carefully. If you notice any incorrect data, you can dispute it with a credit bureau. Catch errors quickly and be sure that your positive payment history is being reported accurately.
As part of our mission to make money smarter, Divvy reports customer credit performance to the Small Business Financial Exchange (SBFE®). That means you can use Divvy to build your business credit history and credit score for your business simply by paying on time. Learn how Divvy can help build your credit.
Repairing bad credit
Like many busy entrepreneurs, you may have been focused on things other than your business credit score. Now you’re looking to secure financing or strengthen your business, and your credit score is holding you back. Luckily, you can take steps to repair your credit, even if you’ve made financial mistakes in the past.
- Get a business credit report: Your credit score is just a number. What you need is the detailed report compiled by a business credit bureau to see why your credit has taken a hit. Carefully examine your business credit report for good and bad line items, looking for errors, big problems, or missing information (such as a healthy credit card account that isn’t being reported).
- File disputes: Incorrect data can be reported to credit bureaus from time to time. If you notice any incorrect or incomplete entries on your credit report, you can file a dispute and resolve them with the credit bureau to repair your credit.
- Increase reporting: Your business credit accounts may report to different bureaus, creating incomplete profiles of your credit. Decide which bureau to target, then be sure that you have multiple reporting credit lines and vendors supplying information to that bureau. Switch accounts and vendors if necessary.
- Pay early: You should always pay on time, but business credit scores can actually get an extra boost when you pay early. Analyze your monthly cash flow and try to pay your credit accounts early whenever possible to begin a slow climb in your credit score.
- Stay below 30% credit usage: Maxing out credit cards is never a good idea, but did you know it can seriously damage your credit? Instead, make an effort to pay down all credit balances to below 30% of your available credit. For example, if you have a business credit card with a $1,000 limit and you have $800 used on that line, you can improve your credit score by paying at least $500 on that card. This is why having a few cards that are all used below 30% of the limit is much healthier than putting a smaller total on one card. Use this principle to strategically pay off any debt you have already incurred.
How does business credit differ from personal credit?
For many small businesses, the foundation of the company was their personal credit history. While that’s a common way to get up and running, it’s best to separate business from personal finance as soon as you can.
Business credit vs. Personal credit
|Business credit||Personal credit|
|Linked to Employer Identification Number (EIN) or Tax ID Number||Linked to Social Security Number|
Reported by Equifax, Experian, and Dun & Bradstreet
Reported by Equifax, Experian, and TransUnion
|Score range 1-100 or 0-300||Score range 300-850|
|Fewer variables impact score||Many variables impact score|
|Easier to improve||Harder to improve|
|Difficult to challenge & remove negative entries||Easier to challenge & remove negative entries|
It is well worth your time to establish a business credit score and work to improve that credit score over time so that your business can grow in healthy and spontaneous ways as needed. With business credit cards, lines of credit, and total visibility into your company’s spend, Divvy is ready to help you in building business credit. Take a demo of Divvy today.