Did you know that your business has credit scores and reports that are separate from your personal credit?
As a small business owner, you might be thinking: “man, are you trying to tell me about yet another thing I have to know about to run my business?” You are likely already wearing 50 hats trying to drive revenue, meet payroll, pay bills, and stay sane in the process.
The good news is that understanding your business credit can be easy, and spending a few minutes learning about it today can save you time AND money down the road.
What are business credit scores?
There are three main reporting agencies that govern the world of business credit scores. These are Experian, Dun & Bradstreet, and FICO. Each arrive at your score by utilizing a mix of drivers and in-house formulas including:
- Years in business
- Open credit lines (6-month history)
- Payment history
- Percentage of available credit
- Length of payment history
- Public records
The range of your business credit scores differ from that of your personal credit scores. This can often be a shock if you are expecting a number between 300 - 850 and instead you see a 80 (which could, in fact, be a good business credit score). Let’s talk more about the score ranges of the three main business credit reporting agencies.
- Experian: Experian’s credit score model is called Intelliscore PlusSM, and is known for being a comprehensive prediction of the likelihood of delinquency within the next 12 months. The score ranges from 1 - 100, 100 representing the least likelihood of delinquency.
- Dun and Bradstreet: D&B’s model is called the Dun & Bradstreet PAYDEX® score, which also ranges from 1 - 100, where higher scores indicate better payment performance. Unlike Experian’s Intelliscore Plus which is forward looking, the PAYDEX score looks at how a firm paid its bills over the past year. A score of 100 represents that the firm made early payments, whereas an 80 represents on-time payments, and a 50 actually means a firm paid 30 days late (30 Days Beyond Terms).
- FICO: FICO is the leading name in consumer credit scores, which often overshadows their business credit scoring model. Their business credit score is called the FICO® Small Business Scoring Service (FICO SBSS). This score takes into account your personal credit as well as collected business credit information to produce a score between 0 and 300, where a higher score indicates lower risk. If you’re seeking an SBA loan, you’ll need a 140 or above to pass the SBA’s pre-screen process.
Why do I need to pay attention to these scores and reports?
Unfortunately, many businesses and consumers don’t think about their credit scores and reports until the moment they need it, or in other words, once it’s too late. Don’t wait until it’s too late! Whether you’re looking to get low-interest rate loans, secure better payment terms from vendors and suppliers, bid for government jobs, etc., good business credit scores will come in handy.
One of the most compelling reasons to build a solid business credit history is to safeguard your personal credit. This is incredibly important for both your personal and business life—a good business credit score can eliminate the need to go into personal debt to fund business needs. If you’ve been in business more than a few months you probably already know that your business life in general has more costs than your personal life. Startup costs pile up, building up inventory requires quite a bit of credit, and buying or leasing equipment can be made much easier with solid business credit.
A good business credit score can also increase your chances of securing a loan. We found that business owners who understand their business credit rating are 41% more likely to secure a loan than those who don’t. What’s more is that your business credit rating can also affect the amount for which you can qualify, as well as the interest rate. For example, the SBA 7(a) loan is one of the most inexpensive loan options for business owners and, as mentioned above, to pre-qualify you must have a FICO SBSS score of 140 or above (applies to SBA loans up to $350,000).
There are a number of other reasons that building business credit separate from your personal credit can help your business. If your suppliers and vendors see that your scores are high, they will feel more comfortable giving you favorable payment terms (net-30, 60, or 90 day terms). Additionally, if you’re looking to do business with the government or large, Fortune 500 companies, your PAYDEX score may be reviewed before they qualify you as a business partner.
As a business owner, building business credit is of similar importance as establishing personal credit. Be sure to exercise financial prudence like you would with your own personal finances for the best chance at accessing better terms when you borrow or attempt to win deals for your business.
Learn more about Nav
Nav provides a free way for business owners to get their personal and business credit reports, as well as tools to help build business credit. Nav’s marketplace saves business owners time by connecting them to credit cards and financing options based on their credit profile.