When you become a business owner, you quickly realize that it isn’t just about your personal credit score anymore.
Yes, your personal credit score still plays a (surprisingly) important role in your business’s life, but now you have another financial indicator to pay attention to: your business credit score.
Just as you monitor your personal credit score by reviewing your credit reports periodically, it’s important to keep up to date on your business’s credit score by regularly reviewing its credit reports, too.
Your business credit score affects your ability to get business loans, enter into leases, and make purchases—and since other businesses, banks, and lenders can check it at any time without your permission, you want to make sure that it’s completely accurate.
But making heads or tails of your business credit report can be tricky. Here’s what you need to know.
There are three main business credit reporting agencies: Dun & Bradstreet (D&B), Experian, and Equifax. They all provide a business credit report that assesses the creditworthiness of your business.
This is really no different than the concept of a personal credit report. A business credit report just shows a lender or partner how trustworthy your business is, not just you.
What’s inside a business credit report?
We’ll dive into the details, but here’s a quick overview of the contents of a business credit report:
The three main business credit reporting agencies—Dun & Bradstreet, Experian, and Equifax—issue business credit reports. You should review each one’s credit report of your business: they’ll all include the same basic information, but can differ on some points here or there.
This is the same with personal credit scores: The personal and business credit reporting bureaus all collect similar information, but it’s not exactly the same.
Plus, they all can collect information on your borrowing behavior at different points in the month.
Your credit report will list your business’s name, phone number, and address. It might also include other details, like SIC or NAICS codes specifying your industry, form of business, any parent companies or subsidiaries, DBAs, annual sales, and the names of key personnel.
This is often called a business profile, and is typically what shows up first when you open up your business credit report.
Don’t be surprised if you also see financial information about your business included in the business profile. For instance, you can choose to self-report your financial statement such that the business credit reporting agencies can see your annual sales and profit.
If your high-level financial numbers are something you’re proud of, then self-report them to the business credit reporting bureaus—the more complete and accurate profile you have with the business credit reporting bureaus, the better for your business credit report.
A business credit report will almost always include how many years a business has been around.
In general, the older a business is, the more stable it looks to potential lenders and suppliers.
This is because the longer you stay in business, the more likely it is you’ll continue to stay in business. A business that’s been around for 5 years has proven it can weather the ups and downs of the market, whereas a new business remains practically untested.
And from the lender’s perspective, stable businesses are a sure bet—meaning they’ll get their money back if they choose to work with you.
This might be broken out into trade payment history, like payments to suppliers, and commercial financial payment history, like your payments on business loans, equipment leases, or business insurance.
Just like the payment history on your personal credit accounts weighs heavily on your personal credit score, your business’s ability to pay its debt is a major factor inside your business credit report.
Any past or outstanding lawsuits, liens, bankruptcies, or court judgments will be included on your business credit report. These include any Uniform Commercial Code (UCC) filings your company has, including liens against your business placed by a lender.
This is used to assess the financial health of your business, along with your business’s liquidity.
In this section, the lien information is probably what a lender would focus most on. Liens heavily influence whether a lender will work with you or not. Some lenders shy away from working businesses with liens due to the nature of a lien. A lien is essentially a legal agreement that gives a lender the right to seize your agreed upon assets in the case you can’t pay back the loan. If you have a lien on your business and its assets, then you can’t pledge those assets as collateral for another lender that’s working with your business—giving the new lender to reassurance that they’ll get their money back if you default.
Bankruptcy and Collections
The report will show any history of bankruptcy filings and/or overdue accounts that’ve gone to collections.
Make sure every element of your credit report is accurate. For instance, if your SIC or NAICS code is wrong, your business might be mistakenly categorized as being in a risky industry when, in reality, you’re perfectly safe. If you see any problems, follow the process for reporting them to that specific credit agency, and check for the same issue across the other reports.
Each business credit reporting agency calculates your credit score based on the information it gathered. The specific numeric value of a good credit score might vary from one agency to another. Don’t panic if you see a credit score of, say, 80. Unlike personal credit scores (also called FICO scores), which range from 350 to 800, business credit scores are calculated based on each credit reporting agency’s own algorithms, and typically top out at 100.
Here’s a closer look.
D&B calculates your business’s PAYDEX score, which ranges from 0 to 100, with 80 and above indicating your business is a good credit risk and 49 and below indicating your business is a poor credit risk. D&B also provides a commercial credit score, which predicts how likely your business is to become severely delinquent on payments within the next 12 months, and a financial stress score, which predicts how likely your business is to fail within the next 12 months. Both of these rank your business from 1 to 5, with 1 being the highest.
Equifax calculates a payment index, ranging from 0 to 100, which reflects your payment history. It also provides a Credit Risk Score that ranges from 101 to 992 and measures how likely your business is to become severely delinquent on payments within the next 12 months. Finally, the Business Failure Score, based on similar factors, ranges from 1,000 to 1,880 and measures how likely your business is to close within the next 12 months. For both, higher numbers indicate better credit risks.
Experian uses a wider variety of factors than the other two to come up with your Credit Ranking Intelliscore, which tops out at 100 and takes into account your number of years in business; how many lines of credit you’ve applied for, opened or used recently; available credit; and late payments and collections.
You’ll have to pay to get a copy of your business credit score, but it’s a worthwhile investment. Each business credit reporting agency offers a variety of options for getting your credit report, as well as for monitoring your business credit on an ongoing basis.