The Basics of Business Credit Scores
If you own a small business, it pays to keep an eye on your business credit score. When you apply for business loans or credit cards, lenders will perform a business credit check. Checking your business credit score tells them how much of a credit risk your business poses, based on past financial behavior.
"Many business owners just don't know that these reports exist and potentially have an impact on their business's financial life," says Gerri Detweiler, education director at Nav, a business credit and financing resource.
Why Does Your Business Credit Score Matter?
The importance of your business credit score depends on whether you'll need business credit products. Some business owners, such as freelancers who do not expect to have employees or to require significant capital, may never need business credit cards or loans.
If you think your business might need financing or other types of credit in the future, make checking your business credit score a priority and take steps to build a healthy business credit file.
"If you're seeking government contracts or (a Small Business Administration) loan, or your company may need to do business with multiple vendors, you should pay attention to maintaining a healthy business credit score," says Detweiler.
Businesses of all sizes may need credit. A carpenter with no employees may want to borrow money to buy equipment. A marketing professional with a few employees may be ready to purchase furniture and computers for a new office. A salon owner with subcontractors but no employees may want to buy, rather than rent, commercial property. Any type of business could benefit from a business credit card.
[Read: Best Business Credit Cards.]
Are Business Credit Scores the Same As Personal Credit Scores?
In some ways, business credit scores are like consumer credit scores. They fall within a range, and the higher the score, the lower the perceived risk. Businesses with higher scores have a better chance at securing financing, and a higher business credit score typically means being charged a lower interest rate on financing.
In other ways, business credit scores are unlike consumer scores. Scores generated for consumers by FICO and VantageScore range from 300 to 850. But ranges are different for business credit scores. For example, some scoring models range from 1 to 100, while others range from 101 to 662 or zero to 300.
In addition to general credit data such as the number of open accounts, balances and credit limits, your business credit report can also include information about your company, your industry, public records and your payment index, which refers to when your company pays its bills relative to the due date.
One big difference between business and personal credit is that there is no federal law governing business credit reports. Because business credit and lending are not covered under the Fair Credit Reporting Act, anyone can access your business credit information, with or without your permission, says Detweiler. She adds that you don't have the right to request a free copy of your business credit report every year, and you cannot freeze your business credit report.
Does business credit affect personal credit? It depends. Most business credit cards and loans require a personal guarantee, which means your personal credit and assets will take a hit if you default on the account. In some cases, business credit card accounts are reported on your personal credit report.
What Are the Types of Business Scores?
Experian, Equifax, FICO and Dun & Bradstreet are some agencies that provide business credit scores. Here's a little bit about each one.
Experian Intelliscore Plus. This score ranges from 1 to 100 and predicts the level of risk associated with a business.
Equifax business risk scores. Equifax offers several different scores, including the Equifax Credit Risk Score, which ranges from 101 to 992 and reflects the risk of severe delinquency on any account.
FICO Small Business Scoring Service. This score ranges from zero to 300 and is based on a combination of factors that include business and personal credit history. The U.S. Small Business Administration uses SBSS to make lending decisions on certain small business loan programs, including 7(a) loans.
Dun & Bradstreet Paydex. This score ranges from 1 to 100 and shows not just whether you pay your bills on time but also when you've paid. "The Dun & Bradstreet performance-based rating is designed to predict the reliability of the company and the likelihood that the business will pay its bills on time," says Amber Colley, senior vice president at Dun & Bradstreet.
How Can You Check Your Business Credit Score?
You generally cannot access your business credit reports or scores for free, but there are exceptions. For example, Nav offers free summary business credit reports and score data from Dun & Bradstreet, Equifax and Experian.
Dun & Bradstreet offers the ability to access and update basic business credit information for free and provides a free service called CreditSignal that alerts you to changes in your business credit report on an ongoing basis.
What Are Business Credit Score Factors?
Several factors determine how high your business credit score will soar -- or how low it will sink.
Business credit score factors include:
-- Payment history, including when you pay
-- Credit utilization, the amount of credit you're using compared with the amount of credit you have available
-- Business size
-- Credit mix
Business and personal credit scores are based on some of the same factors, like payment history and credit utilization, but business credit scores also take into account other factors, like the size of your business and industry norms.
"In the construction industry, it's normal to pay your bills when you get paid by your clients," says Colley. Thus, some industries have a longer "normal" bill-pay timeline than others.
[Read: Best Travel Insurance Credit Cards]
Each business credit scoring agency collects a different set of data and has its own process for calculating your score. This is true even if the scoring ranges look similar.
Detweiler notes that although credit mix is not as important for businesses as it is for consumers, Experian risk scores take into account a larger number of factors -- versus, for example, the Paydex score, which focuses on the promptness of payments. "Among them could be things like types of credit, overall limits and so on," she says. "Creditors may be looking for that type of information, for example, to see what your business's experience is with larger transactions."
Don't expect to see the same level of detail on your business credit report that appears on your consumer credit report. The number and types of trade lines, as accounts are called, will appear but not the names of the companies reporting the data. Instead, each account will be placed in a category.
Business payment history is not reported the same way consumer credit history is. It is shown in the context of days beyond term, or DBT. "If the agreement with your creditor is net 30 and you pay on day 35, your DBT is five," says Detweiler.
Business credit reports not only show when you pay your bills, but also whether you pay early. "Some companies pay before they even get the bill in order to later use their Paydex score as leverage for better terms," says Colley.
How Can You Improve Your Business Credit Score?
Before you can boost your business credit score, you need to establish a business credit file. This doesn't happen automatically when you file a fictitious business name statement or obtain a business license, though.
To prompt the creation of your file, you should:
-- Incorporate or form a limited liability company.
-- Obtain a federal Employer Identification Number from the IRS (free).
-- Obtain a Dun & Bradstreet D-U-N-S number (free).
-- Open business bank accounts in your legal business name.
-- Obtain a listed telephone number in the business's name.
-- Get accounts that report payment history to commercial credit agencies, including some business credit cards, vendor accounts and business loans.
For small business owners who have no plans to incorporate, it's possible to establish a credit file with other steps. Start with a fictitious business name statement, an EIN, a D-U-N-S number and a business bank account, then apply for a loan or credit card in the business's name.
Once the file exists, there is no fast track to a healthy score. "Be proactive, not reactive," says Colley. "If you're brand-new, take on business credit. A personal guarantee may be required, but include your D-U-N-S number with the expectation that over time, once your business has proven that it pays on time, you can request to remove the personal guarantee and potentially rely solely on business credit."
To build your payment history and other data, establish accounts that are reported to credit bureaus. "Dun & Bradstreet requires three accounts to generate a Paydex score," says Detweiler. "For Experian, a report and Intelliscore can be generated with just one account." In addition to a business credit card, open a trade account in the name of the business with a vendor that reports.
[Read: Best Credit Cards for Good Credit.]
Major banks and lenders are all but guaranteed to report. Large vendors, like Home Depot and Lowe's, are known to report commercial account data. You can also ask the vendor directly.
Dun & Bradstreet has a solution for establishing a business credit score with trade lines that are not reported. Business owners can provide vendor and account information, and Dun & Bradstreet will reach out to vendors to verify the details.
However, this service is not free, and costs vary depending on the level and complexity of service.
What Can You Do if You Have a Bad Business Score?
Check your credit standing well before you need to seek business credit. Like consumer credit, your business credit history and score will take time to build. But what if your score isn't up to par?
Check for errors. Monitor your business credit report just as you monitor your personal credit report. If you find an error, each reporting agency has a process in place for disputes. Address every error, no matter how insignificant you think it may be. Even an incorrect industry classification code can affect your ability to obtain credit at the most favorable terms.
Colley notes that any business can update basic company data, including financial data, for free online. An accurate listing is one way you can avoid other companies' data from getting mixed up with yours.
Business credit reporting agencies are not subject to laws relating to correction of errors on reports. There is no industrywide standard process for disputes. Also, lenders are not required by law to notify you of adverse actions taken based on the information in your file.
Because the names of creditors are not listed on business credit reports, it can be difficult to know which creditor is reporting erroneous information.
Pay on time and keep utilization low. A low score may not be due to an error. You can improve it by paying on time or early and by keeping your credit utilization ratio low.
Remember, though, that with some scoring models, credit utilization does not have as big an impact on your business credit score as it does on your personal credit score.
Be smart with credit. On an ongoing basis, handle your business credit responsibly. For many accounts, particularly for smaller businesses, the owner will need to provide a personal guarantee. If the account goes into default, it will show up on the owner's personal credit report.
"Your business and personal credit reports can overlap," says Colley. "As the company grows, so does your personal liability. Ultimately, you should try to separate your business credit from your personal credit to protect your personal credit if the business experiences financial distress."
