Must-know tips to achieve a great business credit score
We all know the importance of maintaining a favorable personal credit history. Your credit score can help you achieve your biggest financial goals. Similarly, when your company has an excellent business credit score, your team can unlock new growth opportunities.
In this article, we'll guide you through the details of your business credit score, how it's calculated, and how you can effectively manage it now and forever.
What's a business credit score?
Your business credit score is a measure of your company's creditworthiness. It defines how likely your organization is to make on-time payments, rather than default on your financial obligations.
Business credit scores come into play in a handful of situations. Most commonly, creditors will use your score to gauge the risk of lending to you when you apply for any form of financing, such as a business loan or line of credit. The score affects how much they're willing to lend, what interest rates they offer, and what terms of repayment you receive.
Insurance companies also use credit scores to determine the rates they offer to your company, while landlords often require tenants to have good business credit scores. What’s more, some suppliers will only work with business owners who have a strong professional credit history.
How business credit scores are calculated
The official business credit score range is 0 to 100. Companies with higher scores are considered low-risk borrowers and tend to receive the best financing options possible.
A few factors that impact your business credit score include your:
- Payment history: The timeliness of your payments have a significant impact on your score, so make sure you always avoid late payments.
- Credit use: Credit scores can change based on what percentage of your credit limit you're using. Keeping your credit utilization ratio under 30% is ideal for showing lenders that your business is a responsible borrower.
- Business history: Your company's age and size are often taken into account. This is why newly established small businesses may have a harder time borrowing until they start to build business credit.
- Credit mix: Having multiple forms of credit, such as a loan and a corporate credit card, will help your business improve its score.
According to the Small Business Administration (SBA), hard inquiries from potential lenders can lower your business credit score, much like your personal credit score. With this in mind, space out any relevant applications to avoid damaging your score.
3 major business credit reporting agencies
Every business credit bureau has a unique scoring model. There's no centralized method used across the United States, much less the world.
Your potential creditors will most often consider your business credit history by pulling financial information from the three leading credit agencies: Experian, Dun & Bradstreet, and Equifax. We'll explain some key facts about each one to help keep your company's credit score healthy across all of them.
Experian calculates your score by considering three categories of business credit information:
- Your credit history: This includes your credit mix, unpaid balances, payment history, credit utilization ratio, and general trends in your credit usage.
- Demographic information: Your credit score will take into account your business history and your Standard Industrial Classification (SIC) code.
- Public records: Experian also pulls information from any liens, judgments, or bankruptcies associated with your business. Any time you're sent to collections, it will reflect poorly on your business credit score.
2. Dun & Bradstreet
To calculate your credit score, D&B uses its Paydex score model, which predominantly looks at when you pay what you owe. Making on-time payments is the single most important factor for improving your credit score from this agency.
The only other way you can improve your D&B business credit score is by asking for trade references. When the suppliers and vendors you work with submit positive reports about their payment experiences with your business, D&B will take this into account.
Equifax is a unique scoring service that calculates three widely used types of business credit scores for every business.
The first — known as the Payment Index — works a lot like D&B's Paydex score in that it looks at your payment history from the past year. Using this model, scores between 90-100 are ideal because it shows that you typically make fully on-time payments, whereas scores between 80-89 show that you have a balance that's often up to 30 days overdue. Lower credit scores under the Payment Index show that you have a habit of leaving balances unpaid for longer than a month.
The Business Credit Risk Score is the second type of score that Equifax is well-known for. This score, which falls between 101 and 992 (higher scores being ideal), shows how likely your business is to leave debts unpaid for over 90 days in the upcoming year. Your credit risk score looks at your company size, credit limits, and credit age. Any invoices you leave unpaid can also impact your score.
Finally, Equifax provides a Business Failure Score that measures how likely your business is to fail in the upcoming year. This score ranges from 1,000-1,880 (the higher, the better). To have a strong business credit score under this model, it's ideal to:
- Have had no or minimal late payments in the past two years
- Have older financial accounts
- Maintain a healthy credit utilization ratio in the most recent three months
3 tips for managing your business credit score
Now that you know the criteria for each business credit reporting agency, it's time to learn how to improve your business credit score and keep it in the ideal 80-100 zone.
Your credit score is tied to your Employer Identification Number (EIN), which is like your company's Social Security number. As such, you can't simply start over if your credit history goes downhill.
Managing business credit wisely is an active process. Keep up with your credit history as closely as you would your company's cash flow, and make smart decisions to keep your business credit files clean.
Beyond the tips we’ve already provided, here are three ways you can effectively manage your score:
1. Access your business credit reports
Whether you purchase your Experian, D&B, or Equifax business credit report — or better yet, all three — regularly requesting a detailed account of what's impacting your score can help you determine how to improve it. These reports range from $40 to $100, and provide the most accurate picture of your credit history.
Requesting these reports will not hurt your credit score, since pulling your own credit information is considered a soft inquiry.
Another reason these reports are critical is because credit agencies can make mistakes. Your score could be lower because of an issue you can quickly resolve.
Among reports, you can also get some free credit monitoring services from Dun & Bradstreet just by signing up for a D-U-N-S number and setting up your credit profile on the agency's site. Credit.net is another excellent tool you can use to get alerts on your business credit score.
2. Work with the right vendors and lenders
The best vendors to work with are those that share their experiences with major credit agencies. Similarly, you'll also want to borrow from financial institutions that report to the credit bureaus.
While this isn’t required for your business relationships, it can help you quickly improve your credit score, as long as you're making all your payments on time and keeping a healthy credit utilization ratio.
Having vendors with high credit scores is also important, because their ability (or inability) to pay directly impacts you.
3. Open credit accounts (and keep them open)
When your business credit score needs some boosting, it can be smart to open new credit accounts — as long as you know you'll have the funds to pay back your lenders on time.
The number one rule is to never overspend. However, when you’re certain you can afford to open multiple lines of credit, it can be one of the best paths to a good credit score. Keep your credit accounts open to further improve your score over time by increasing the average age of your accounts.
To get started, consider opening a business credit card with Brex, getting a small business loan for your growing company, and establishing similar credit accounts when it makes sense.
Become the picture of financial health
Understanding how business credit scores work can help you maintain a healthy credit history and access more financing opportunities and low interest rates. While boosting your credit score can take some patience — letting your accounts age and making a habit of on-time payments — the results will be worth the wait.
As you embark on your journey to a business credit score that's as close to 100 as possible, learn about 6 startup business loans that can build your credit further.