Is Your Business Credit Score Keeping You From Capital?

Emily Kate Pope

Emily Pope is the Managing Editor at Fundera. She specializes in all things small business finance, from lending to accounting. Questions for Emily? Comment below!

Have you ever heard of a business credit score?

If you’ve ever learned much about personal financial management, you know that maintaining a strong personal credit score is critical to your ability to qualify for things like a home mortgage, personal or car loan, or even a personal credit card.

But did you know that this same system of credit monitoring and reporting also exists for businesses?

That means the decisions you make with your business finances when you first open your company can have an impact that lasts long into the life of your business.

Let’s take a deep dive into exactly what a business credit score is, how it might be impacting your access to business capital, and what to do about it.

What Is a Business Credit Score?

business credit score

Just as your personal credit score provides a way for creditors and lenders to determine whether or not to approve your home mortgage, credit card, or other form of personal financing, your business credit score serves the same purpose for your small business.

Over time, your business will develop a reputation (in the form of your business credit score) for how consistently you pay invoices on time, manage your cash flow, and generally act as a trustworthy borrower.

From the moment you open your small business, the choices you make and the ways that you handle your finances can potentially impact your business credit score. However, because business credit is not regulated in the same way as personal credit—and because you as the business owner are still personally involved in your businesses finances—business credit reporting and scoring can tend to vary more considerably than the far more regulated FICO personal credit score.

Let’s dig a little bit deeper into how business credit reporting works and what factors you should keep in mind when working to build a strong business credit score.

How Do Business Credit Reports Work?

When you apply for a business loan, one of the first things lenders do is look up your business credit report. This can be done through one or several of the major business credit reporting agencies, including Scorely, Experian, and Dun & Bradstreet, among others. But because business credit scores aren’t regulated in the same way as personal credit, each business credit reporting agency has its own formula for calculating scores.

In fact, the various agencies don’t even all use the same scale! Agencies like Dun & Bradstreet, Experian, Equifax, and Scorely calculate business credit scores on a scale of 0 to 100, while the FICO small business credit score is measured on a scale of 0 to 300.

The 5 Factors Impacting Your Business Credit Score

Despite the lack of consistency between the various business credit scoring agencies, you can generally expect that regardless of the agency involved, your business credit score will be impacted at least to some extent by these five factors:

1. Time in Business

When your business is brand-new, your business credit score will be lower simply due to a lack of credit. This will matter less after your business reaches two years of operations, when banks become more willing to fund business loans.

2. Payment History

Your consistency in paying bills on time, every time is the single most important factor impacting your business credit score. Even a single late payment can weigh heavily on your future access to capital, so it’s critical that you set up a system to maintain payments from the beginning.

3. “Credit Mix”

There are many ways to build credit, such as using a business credit card, taking out loans, or establishing trade lines. And future lenders want to know that you can appropriately manage your finances in any borrowing situation. To maximize your business credit score, consider taking out multiple forms of credit (that means not just a single business credit card!) as you’re able to maintain a strong mix of different forms of business credit.

4. Credit Utilization Ratio

Reporting agencies want to see that you are using the credit you have responsibly, which means making payments regularly and not over-relying on the credit you’ve been extended. For best results, keep your credit utilization at around 25% of the total amount you’ve been extended.

5. Mistakes on Your Business Credit Report

Unfortunately, the business credit reporting process is not a perfect one, and errors in reporting happen more often than you may think. Debt or credit defaulting can be mis-attributed to your business credit report, causing your business credit score to take a plunge for reasons totally out of your control. So, do monitor your credit reports regularly, and request corrections promptly and in writing for any mistakes you might find.

What Your Business Credit Score Tells Potential Lenders

Although your credit score is not the only factor used by a lender in deciding whether or not to give you a loan, it’s still a very important part of this process. Your business credit score tells potential lenders, vendors, and suppliers what kind of terms and interest rates to extend to your business. With a stronger business credit score, you’re in a position to negotiate for better rates and terms in the future.

Particularly if you plan to apply for major financing to expand your business in the future, it’s a good idea to pay close attention to your business credit score, working to build your credit and maximize future borrowing opportunities.

How to Check Your Business Credit Report

Just like with your personal credit, as a small business owner, you can and should check your business credit score regularly to ensure that you’re managing your business finances in a way that reflects positively with creditors.

Keep in mind, though, that there are multiple business credit reporting agencies, and each one has a different method for gathering information about your credit history and calculating your business credit score. We recommend checking with the following agencies regularly to review changes to your business credit history:

When you receive your credit report, be sure to review the data carefully and make sure the information listed is accurate. If it’s not, you’ll want to reach out to the reporting agency immediately and in writing in order to request a correction. Most credit agencies are responsive to correcting errors as long as you have evidence of the mistake. However, the process can take time—so be proactive about any reporting issues as soon as you can.

Do These 7 Things to Improve Your Business Credit Score

Once you have taken a look at what is actually in your credit report and how it is impacting your credit score, you might be more motivated to take proactive steps to improve it. Particularly if obtaining a business loan at a favorable interest rate is a priority, make sure you’re doing these seven things to make your business credit score the best it can be.

1. Separate Business and Personal Finances

Keeping your business and personal finances 100% separate is an absolutely critical part of building your business credit score. That means separate bank accounts, separate credit cards.

Luckily, a whole host of national and local banks offer free business checking accounts. Open this account as soon as you can.

When asked for either your social security number or your business EIN in the account application process, be sure to use an Employer Identification Number specific to your business. To ensure that your financial history is always credited to your business entity, follow this guideline with every account you open.

2. Ask Suppliers to Report Your Payment History

Chances are that you’ll be working with third-party vendors at some point over the life of your business. Many of those vendors operate on trade credit, meaning they provide a product or service for you up front and bill you through an invoice later on.

In order for the trade credit relationships you establish to count toward increasing your business credit score, make sure that your payment history gets passed along to business credit reporting agencies.

When selecting any supplier with whom you will have an accounts payable relationship, ask up front whether they plan to report your payment history to a business credit bureau. This helps ensure that your on-time payments to these vendors can positively impact your business credit score.

3. Use a Business Credit Card for Day-to-Day Expenses

In addition to large-scale business expenses, the day-to-day operation of your company undoubtedly involves smaller one-off and recurring costs. Paying for those smaller expenditures with a business credit card lets you manage your expenses while also building your business credit.

For the best possible impact on your business credit score, treat your credit card spending as if it were cash. Don’t spend money you don’t have, and pay off your business credit card bill in full each and every month.

4. Set Up an Accounts Payable System to Avoid Late Payments

This cannot be overstated: paying your business’s bills on time, every time is the single most important thing you can do to maintain a strong business credit score.

Even a single late payment can have a dramatic impact on your future ability to obtain capital for your business, which is why you need a reliable accounts payable system to help you keep track of the payments you owe to vendors, lenders, and anyone with whom your business has a trade relationship.

5. Sign Up for Business Credit Monitoring Services

An alternative to paying for your credit score once every year, is to have your credit regularly monitored by the companies mentioned above.

Along with allowing you to address issues of identity theft before they can impact your business, using a credit monitoring service is a great way to quickly catch any mistakes that may pop up on your credit report, allowing you to make corrections before the anomalies can impact your access to capital.

Certain services will send you business alerts relating to a multitude of credit “red flags.” This lets you access your credit file at your discretion—a helpful advantage to have as you prepare your future business loan application.

6. Obtain a DUNS Number for Your Business

The Data Universal Number System (DUNS) is a worldwide numerical identification system managed by business credit reporting agency Dun & Bradstreet (D&B) that established a unique nine-digit code for every registered business. Obtaining this number for your business will help you to establish your business credit history not only through Dunn & Bradstreet but with other reporting agencies as well. You also need a DUNS number if you ever plan to apply for an SBA loan.

Register for your business’s DUNS number through Dun & Bradstreet’s online application portal. It only takes a few minutes to provide your company’s legal name and address, your contact information, and a few other basic pieces of information. From there, it should take about a month to receive your DUNS number via email or snail mail.

7. Allow Time to Build Your Business Credit

Building up your business credit score can feel like a mountain of effort that seems to never pay off—but be patient, and stay the course. It will take time for your new efforts to better manage your business credit to impact your credit reports and score, but ultimately it will make a difference. And as your access to low-cost working capital for your business improves, you will realize that putting in the work to improve your business credit was worth it.

Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author’s alone, and have not been reviewed, approved, or otherwise endorsed by any of these entities.

Emily Kate Pope

Emily Pope is the Managing Editor at Fundera. She specializes in all things small business finance, from lending to accounting. Questions for Emily? Comment below!

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