by Ian Atkins A business credit score measures the creditworthiness of a company and is based on information in a business credit report. It is used for various purposes, including as criteria for obtaining commercial funding.
There are four major business credit scores, issued by FICO SBSS, Dun & Bradstreet, Equifax, and Experian. Each bureau uses a slightly different scoring approach, but all major business credit scores assess a company’s ability to make on-time payments.
The Importance of Your Business Credit Score
Ultimately, your business credit score measures your company’s overall financial health. It’s typically used by lenders, creditors, and trade partners during various business transactions, such as applying for business loans, leasing, winning contracts, doing business with vendors or suppliers, obtaining net terms with trade partners, and even getting better mortgage rates.
Overall, a good business credit score can help you get the financing you need to help with working capital requirements or to fund your business’s ongoing growth. For example, lenders are more likely to approve you for a loan if your business meets their minimum business credit score requirements. What’s more, the higher the business credit score, the better the terms.
Likewise, vendors, suppliers, landlords, and would-be trade partners look at your business credit score to determine the likelihood that your payments will be on-time and in good standing. This makes it easier for them to decide whether you are worth doing business with. Further, this also dictates the type of payment terms you’re likely to receive.
In some cases, your suppliers may extend net terms, meaning deferred payment for a specific amount of time. Businesses with stronger credit scores may be more likely to secure favorable net terms, pushing out the due date of your payment for 30, 60, 90 or more days after receipt of the goods or services purchased.
Related Article: What is a Merchant Cash Advance?
What is a “Good” Business Credit Score?
Business credit scores typically range from 0 to 100, though some scales (such as FICO SBSS) go higher. A high score is considered a “good” business credit score, which means the business’s credit risk is low. Dun & Bradstreet considers a “good” credit score to be 80+, while Equifax’s good credit score is 90+, and Experian’s good credit score is 76+. A good credit score for FICO SBSS is 140 or higher.
When a business’s credit score is high, it means that a company has a lower likelihood for late or delinquent payments. This makes them a prime candidate for loans, net terms, and other business transactions with trade partners.
How to Improve Your Bad / Thin Business Credit Score
Your business credit score is based on several factors, such as debt repayment history, liens, bankruptcies, and more. A bad business credit score shows that you have a history of payment defaults. Thin credit, on the other hand, means that you don’t have enough business credit history to determine creditworthiness.
Both bad and thin credit can affect your business transactions, especially when you’re applying for a loan. For example, you might only be eligible for bad credit business loans instead of other loans with better terms. It’s important to find ways to improve or build your business credit to make the information on your business credit report better, thereby enhancing your credit score.
Increasing or establishing your credit can’t be done overnight. However, there are simple steps that can help restore your credit. Here are 6 ways that can help fix your credit ratings:
1. Don’t Mix Your Business and Personal Finances
Your business is a separate entity and shouldn’t be mixed with your personal affairs. Your personal finances, for example, shouldn’t affect your business credit at all. You can do this by using two separate accounts: one for personal use and one for business. This has the added benefit of helping you track and manage both your business and personal finances.
2. Pay Your Bills on Time
Your payment history is one of the most important things that affects your business credit score. You have to pay all your suppliers and lenders on time if you want a high rating. The longer a bill is overdue, the worse it will be for your business credit score. Likewise, if you pay bills early, you may be able to further increase your business credit score.
Note that net terms are not the same as late payments. Paying a vendor 60 days after receipt of your purchase is fine if you have 60+ day net terms. However, net terms themselves can still lead to late payments. If you have 60 day net terms and don’t pay within that time period, the payment is still late.
3. Build Credit with Vendors
It’s important to establish good business relationships with your vendors and suppliers so they report on-time and early payments to the credit bureaus. However, not all vendors do this automatically. It’s a good idea to choose vendors and creditors that’ll report good payments to the credit reporting agencies.
4. Keep Your Credit Utilization Ratio Low
Most businesses that cannot get approved for business loans often use business credit cards to build their credit. Using a business credit card – but keeping a low credit utilization ratio – will reflect positively on your business credit report and score. The ideal monthly credit utilization ratio is below 33%.
5. Check Your Credit Reports and Ensure Accuracy
It is necessary to check your credit reports regularly to ensure that the information stated is correct. Any erroneous information must be corrected by the business. Each credit reporting agency has its own procedures in disputing errors. It takes about a month or more to correct mistakes in the report, so you might as well do it when you still don’t need it.
6. Open Additional Credit Lines
If you have a bad or thin business credit, getting a secured business credit card is a good option to rebuild or establish your credit. Since it is backed by deposit, it is easier to get approved for a secured business credit card even with poor credit score or thin credit history compared to a regular business credit card. Make sure to pay your bills promptly as this will be reflected in your credit report.
Bottom Line
Your business credit score is used to assess your company’s creditworthiness. If you have bad or thin business credit scores, there are still opportunities to increase it. Making on-time and early payments with your lenders, creditors, and suppliers is a great way to start increasing your bad or thin business credit score.
by Ben Dwyer