Finance 101 - 12.16.2016

Business Credit Score 101

What It Is, Why It's Important and How to Improve It

As an individual with credit, you are no doubt familiar with the concept of having a credit score and how certain criteria can raise or lower your score.

A business also has a credit score, and just as your business is a separate entity from yourself, so too is the business credit score separate from your personal credit score. So it's important to have a good business credit score in order to conduct certain areas of your business effectively, such as ordering from suppliers, acquiring small business loans or establishing lines of credit.

What Is a Business Credit Score?

Your business credit score is calculated by a major credit reporting agency such as Experian. The agency uses a number of criteria to determine your score. These criteria can include:

  • Background information regarding your company.
  • State, county and local office filings.
  • Credit reporting information from vendors, suppliers and lenders.
  • Collections information.
  • Public records.
  • Demographic information.

The Difference Between Business Credit and Personal Credit

While the concept of business credit is pretty similar to personal credit, it should always be established separately. Otherwise, using personal credit in conjunction with business credit can negatively affect your personal score (by driving up utilization). You're also missing a great opportunity to build your business score.

Why Is a Good Business Credit Score Important?

At some point in time, you may decide you need to take out a small business loan or open a line of credit in order to have more capital for your business as it grows. Lenders will look at your business credit score to see if you are an applicable candidate for a loan or if it is too much of a risk. A good business credit score not only increases your chances of getting a small business loan, but also improves your chances of getting the loan at a lower APR.

How to Build Business Credit

There are several ways to build and improve your business credit score. These include:

  • Establishing trade lines (accounts with suppliers, business credit cards, etc.) This is the core data of your business credit score. It is a somewhat similar to having personal credit cards, but instead of a standard credit card account, you have business credit accounts.
  • Always paying on time. Paying on time ensures that your credit maintains a good rating, and of course, vendors also appreciate prompt payments and will continue to do business with you. If you don't pay your trade lines, you risk vendors refusing to do business with you and your credit score will be negatively impacted.
  • Asking suppliers to report your payment information. Most financial institutions will report your payment history to the bureaus, but most of your credit will actually come in the form of trade accounts from suppliers, who don't always report to bureaus. But many will if you ask them to. So ask!

In conclusion, it's always important to try to maintain a good business credit score. Even if you aren't currently seeking a small business loan, you may require extra capital in the future, and having a good business credit score already secured will help you avoid a lot of stress and issues at that point in time.


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