If you've ever applied for a credit card, taken out a loan or mortgage, or agreed to a background check, you may be familiar with your personal credit score. Lenders use personal credit scores to determine your "creditworthiness" — how likely it is that you will repay the loan on time and in full.
Businesses have credit scores too. A strong business credit score can give you access to lower interest rates, lower health insurance costs, and better vendor payment terms. It also impacts the funding options available when you decide it's time to expand, merge or acquire another business, or valuate your business for a sale.
It's important to be proactive about managing your small business credit score. However, in a Nav American Dream Gap Survey, 72% of small business owners said they did not know where to find information on their business credit score.
If you are just getting started building business credit or haven't yet checked your score, here's how to get the information you need to improve your position.
[Read more: How to Establish and Build Business Credit]
What is a business credit score?
Business credit scores are like personal credit scores. They indicate to credit agencies, lenders, and other businesses and investors how trustworthy your business is when it comes to borrowing money.
Business credit scores are derived from information provided by a business credit report. These reports provided data such as:
- How long you've been in business.
- How much revenue your business brings in.
- The value of your assets, such as real estate.
- If you have outstanding debts.
- The level of risk for your industry.
- Your personal credit history.
Your credit report might also include other less important indicators, such as the number of people you employ, your business bank account information, and miscellaneous historical data that paints a clear picture of your financial situation.
Notably, your personal credit score can impact your business credit, especially if you are a new venture. "If you have some history that indicates your likelihood to pay back loans in the future, this can affect your score, as well as make you more attractive to lenders," wrote Fundbox.
It's smart to check your FICO SBSS score if you plan to apply for a loan from the SBA. The SBA uses the SBSS score to prescreen businesses applying for SBA 7(a) loans above $350,000.
Why is your business credit score important?
Your business credit score is more important than you may realize. According to a study by the U.S. Small Business Administration (SBA), 20% of small business loans are denied due to business credit.
It's worth the effort to establish and maintain strong business credit. "A solid business credit score can increase your chances of landing a small-business loan or line of credit at favorable terms," wrote Nerdwallet. It can also qualify your business for lower interest rates.
Strong credit can help you get lower business insurance rates. Likewise, vendor invoice terms — the number of days you have to pay a supplier after receiving goods or services — depend on your credit score. You'll have more leverage to get better terms with a higher credit score, which can help your cash flow.
Finally, a business credit score allows you to separate your personal and business finances. "Having a business credit score can help you access credit for your business without leaning on your own personal credit," wrote Bankrate. "This can be immensely helpful when it comes time to file your taxes each year as well, since the U.S. tax system requires that you keep your business and personal finances separate if you plan on deducting expenses."
New businesses may not be able to get a credit score within the first year of operation, but keep in mind that the financial decisions you make impact your score down the road. Established ventures should periodically request their business credit reports to ensure there are no errors and no surprises when it comes time to request a loan or get an insurance quote.
How to request your business credit report
Three main agencies offer business credit reports.
The first, Dun & Bradstreet (D&B), provides a comprehensive report that includes a credit summary as well as a few different scores, such as a viability rating and delinquency predictor score. The D&B credit score is known as the Paydex score and ranges from 0 to 100, with 0 to 49 scores being the highest risk.
Equifax also offers a business credit report package that includes your company profile, a credit summary, and several proprietary risk scores: one that predicts the likelihood of a business becoming 90+ days delinquent, a business failure score that predicts the likelihood that a business will fail while owing a debt to creditors within the next year, and a payment index that quantifies a business's payment habits.
Finally, Experian's Intelliscore Plus report comes in several forms depending on how much information you wish to review. The least expensive Experian report costs around $40 and will give you your business credit score and an overview of your business information. More detailed reports cost $1,400 or more, analyzing up to 30 businesses each month, including public records and scores.
To check your business's credit report, choose one of the agencies, go to their website, and follow the steps to create an account and submit the required information. The credit agency will probably ask for your business's DUNS number or tax ID number to get the report.
According to Fundera, here's what you can expect to pay for your business credit report:
- Dun & Bradstreet: A one-time report costs $121.99.
- Equifax: A one-time report costs $99.95.
- Experian: A one-time report costs $39.95.
There's a fourth option that's become more popular among small business lenders: Fair Isaac Corporation's (FICO) Small Business Scoring Service (SBSS). "This is a product of FICO that is designed to assess the credit risk of small businesses. SBSS scores range from 0 to 300, with a higher score indicating a lower credit risk," wrote CRS.
It's smart to check your FICO SBSS score if you plan to apply for a loan from the SBA. The SBA uses the SBSS score to prescreen businesses applying for SBA 7(a) loans above $350,000. However, since the SBSS scoring model draws on information from Experian, Dun & Bradstreet, and Equifax, it shouldn't be radically different than checking any of the other business credit reports.
Where to check your business credit for free
There isn't a way to get regular, free business credit reports. However, there are ways to get partial information for free from a few different sources. This information can help you keep track of where your business stands while keeping costs low:
- Dun & Bradstreet offers a free Credit Insights report with limited access to four key scores.
- Nav offers free accounts that give you summaries and high-level information about your business credit reports and scores.
- Creditsafe has a limited offer of one free credit report and business credit score.
Some banks, including Bank of America, may even offer a free business credit report when you sign up for an account. Check with your local branch to see if this offer is available for your business.
How to understand your business credit score
There's a lot of information in your business credit report, but what you should focus on first is your business credit score. Each agency has its own rating system. "A good business credit score is considered anything higher than 76 for Equifax or Experian, 80 from Dun & Bradstreet, or 160 from FICO SBSS, which is the minimum for SBA loans," wrote CRS.
If your initial report shows a score under those standards, don't panic. There are many reasons why your score might be lower than you expect. A new business, for instance, won't have enough credit history to generate a credit score. Or it could be some incorrect information in your credit report: Check your business credit report carefully to make sure it's all accurate.
You can turn a bad business credit score around in time. "Making on-time payments, establishing trade lines with suppliers and working with creditors that report to the main business credit bureaus are good places to start," wrote Nerdwallet.
[Read more: 4 Essential Steps to Protecting Your Business Credit]
How to improve a low business credit score
Improving a low business credit score involves building consistently good habits over time. Start by making sure your business information stored at each of the credit bureaus is up to date. Visit each credit bureau's website to upload recent financial statements and check your business credit report for errors and inaccuracies.
Then commit to paying your bills on time, maintaining a low credit utilization ratio, and collecting trade references to add to your credit file. "Trade references are based on a handful of factors, like the manner of payment, the current amount you owe, and the current amount (if any) that's past due. Positive trade references help boost your business credit score," wrote Fundbox.
Building your business credit is a similar process to building strong personal credit. Committing to paying your bills on time and managing your cash flow so that you don't start to fall behind are the best ways to improve your score over time.
Why do lenders and vendors care about business credit?
Business credit is often used as a shorthand to help lenders and vendors understand your reliability and ability to repay debts. Lenders use credit to asses the risks of lending money and to determine the likelihood of repayment. A good business credit score indicates a company is financially stable and trustworthy.
Vendors also use business credit history to assess a company's ability to pay for goods or services on time. Vendors take a risk by providing goods or services on credit; therefore, they want to make sure they are dealing with a reliable customer. A strong business credit score can boost your credibility and reputation within the industry, making you a more attractive business partner.
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