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. Personal credit scores are used by lenders to determine your “creditworthiness”—how likely it is that you will be able to repay the loan on time and in full.
Businesses have credit scores too. Your company’s credit score determines the business loans for which you can apply and gives you access to other types of financing. Know your business’s credit score to understand what funding options are available when you decide it’s time to expand, merge or acquire another business, or valuate your business for a sale.
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.
While individual credit reports provide a credit score typically ranging from 300 to 800, most business credit scores use a scale ranging from 0–100. The FICO Small Business Scoring Service (FICO SBSS) ranges from 0 to 300. A good credit score for Experian, a credit rating agency that uses the 0–100 scale, is 76 and up.
[Read more: How to Establish and Build Business Credit]
New businesses may not be able to get a credit score within the first year, but keep in mind that the financial decisions you make will impact your score down the road.
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, 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.
A good credit score can help you save money in other areas of your business, too. 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, but keep in mind that the financial decisions you make will impact your score down the road. Established ventures should periodically request their business credit reports to make sure there are no errors and no surprises when it comes time to request a loan or get an insurance quote.
[Read more: 4 Essential Steps to Protecting Your Business Credit]
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