Understanding Business Credit Scores: A Comprehensive Guide for Entrepreneurs

As an entrepreneur, you are familiar with the excitement of turning concepts into successful businesses. Whether you started your small business with your own money or with outside funding, you want to take it to new heights. And with the growth of your business comes the need for more funds. 

When funding your business, it’s important to understand business credit – how it factors into your business growth and potential, how it’s computed, what comprises it, and how important it is.

In this article, you will learn more about business credit scores.

What is a business credit score?

Your business credit score serves as a report card for your company’s financial behavior – it is a signal that shows if a company is suitable for getting a loan or becoming a business partner. This important credit data is primarily used by lenders, suppliers, and potential partners to assess your creditworthiness and gauge the level of risk they might encounter when dealing with your business.

Just like your personal credit score reflects your financial responsibility, your business credit score does the same for your business. It considers factors such as payment history, credit utilization, length of credit history, and any past financial mishaps.

Why is maintaining a good business credit score important?

Maintaining a good business credit standing is essential since suppliers frequently examine your business’ credit score before providing terms, and having a positive credit standing helps you secure favorable terms when negotiating. Banks also primarily rely on company credit scores and FICO scores when deciding on credit lines. Without a company credit score, a solid personal credit history is required to qualify for a small business loan based only on personal credit assessment.

How is a business credit score calculated?

Now that you understand the essential role of your business credit score let’s take a closer look at the factors that influence it.

  • Payment history. A critical foundation of your business credit score is your payment history. It’s all about when you pay your bills – on time or delayed. Consistently meeting your financial obligations creates a positive score, while missed payments can lower it.
  • Credit utilization. This is your credit balance divided by your credit limit. Maintaining a low ratio displays responsible credit usage, and maxing out your credit cards can signal financial strain. 
  • Credit history. The longer your record, the more reliable you appear. New businesses might face challenges here, but time can be your ally in building a solid credit foundation.
  • Credit variety. Lenders also consider the types of credit you’ve used. This could be credit cards, loans, or other financial arrangements. A mix of credit shows you can handle various financial responsibilities.
  • Public records. Bankruptcies and liens might have an impact on your credit score. Keeping a clean record here is crucial to maintaining a positive score.
  • Performance. Your credit performance is also measured against similar businesses. This comparison provides context, showing how your company stands in your industry.
  • Industry. Your business type and industry play a role too. Lenders take into account the unique risks and challenges your industry might face.

What is a good business credit score?

Different credit bureaus issue business credit reports. Let’s take Equifax, for example. Equifax provides three different scores: Payment Index, Business Credit Risk Score, and Business Failure Score.

Payment Index Score

This number, ranging from 1 to 100, reflects your business’s payment history. Scores from 90 to 100 indicate timely payments, while scores from 80 to 89 might result from a bill overdue by up to 30 days. Scores drop to 60-79 for bills late by 31 to 69 days, 40-59 for 61 to 90 days late, and 20-39 for 91 to 120 days late. Beyond that, scores range from 1 to 19.

Credit Risk Score

The score ranges from 101 to 992; a higher Equifax credit risk score signifies lower risk. Lenders use this score to assess payment likelihood, timing, potential financial difficulties, and suitable credit extension. Generally, a score above 556 is considered good, while 0 suggests bankruptcy.

Failure Risk Score

With scores between 1,000 and 1,610, lower Equifax failure risk scores indicate a higher likelihood of your business ceasing operations within a year. This score offers insight into your business’s future stability, calculated from commercial data, credit history, payment details, and legal records.

How can you strengthen your business credit score?

Here are ways in which you can proactively fortify your business credit score. 

  • Open a business credit card. Separate your personal and business finances by getting a dedicated business credit card. Use it wisely to establish good credit history.
  • Establish trade lines. Work with suppliers who report your payment history to business credit bureaus. Timely payments for goods and services can bolster your score.
  • Pay bills promptly. Make it a priority to settle your invoices on time. Consistent payments demonstrate your commitment to financial responsibility.
  • Monitor your credit report. Regularly review your business credit report for inaccuracies and inconsistencies. Dispute any errors promptly to ensure an accurate reflection of your creditworthiness.

Final thoughts

Now that you have learned more about business credit scores, you can have a better hold of it. Knowing and handling your business credit score can help you better manage and strengthen it and, in turn, drive business growth. 
For more insightful articles on a wide range of topics, such as eCommerce, online marketing, and web development, visit Webocreation.com’s blog.

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