Business Credit Scores: Everything You Need to Know

Just as individuals have credit scores that reflect their borrowing and repayment history, businesses are also assigned ratings that serve as a measure of their creditworthiness. This metric directly impacts the ability of legal persons to secure financing, negotiate favorable terms with suppliers, and even attract potential investors. So, for entrepreneurs, small business owners, and corporate entities alike, understanding credit scores for businesses is crucial.

What is a business credit score? How is it calculated? Why does it matter? How to get a business credit score? How can companies build strong ratings? In this guide, we’ll look into the ins and outs of business credit scoring to enable organizations to confidently navigate the complex world of business finance.

Business Credit Score Fundamentals

A business credit score functions much like personal credit ratings. It serves as a numerical indicator of a company’s financial stability and reliability as a borrower. In other words, it shows how strong the company’s financial standing is and demonstrates its capability to fulfill its financial obligations.

Factors Determining Your Business Credit Rating

Credit scores for businesses are generated by one of the reporting agencies. Dun & Bradstreet, Experian, and Equifax are among the most popular ones. Similar to individual scoring models relying on info from personal credit reports, business scoring models also hinge on a few crucial factors that appear on business credit reports:

• Payment History: Timely payment of bills and obligations to creditors and vendors is a decisive factor in calculating a credit score for businesses that evidences financial responsibility and credibility.
• Credit Utilization: High levels of business outstanding debt as compared to its available credit signal financial strain and instability and can lower the credit score for your business.
• Length of Credit History: A longer history gives lenders and stakeholders more information to evaluate a company’s creditworthiness.
• Public Records and Liens: Negative information such as bankruptcies, liens, and judgments can seriously injure your business credit score. These are marks of financial distress, signaling that your company is an unreliable borrower.
• Industry Risk Factors: Certain industries are inherently riskier than others due to such factors as market volatility, regulatory environment, and competitive landscape. Reporting agencies consider these industry-specific risks to assess the likelihood of failures in your industry when calculating your business credit rating.
• Business Size and Age: Larger, more established enterprises with a longer track record of stable revenue streams and strong financial reserves are generally viewed as lower risk by creditors and may be assigned higher scores.

It’s worth noting that a personal score has nothing to do with business creditworthiness. Thus, even if your individual rating leaves something to be desired, you can still have a strong business rating. However, when registering business credit cards or loans, your personal rating will be on the creditor checklist as business crediting calls for personal facial guarantees.

What Is a Good Business Credit Score?

When it comes to scoring, a business credit score range is different from a personal rating scale. The most popular scoring model developed by the D&B agency is called PAYDEX and offers a 1 to 100 range for payment performance, showing your company’s ability to settle payments on time. The Experian Intelliscore Plus model uses the same scoring range for the payment index. The higher the score, the better.

Besides, both agencies have separate scoring ranges for assessing the risk of bankruptcy and the likelihood of delayed payments for each business entity.

Why Is a Business Credit Rating Important?

A major mark of a company’s financial standing, business credit rating is critical for the financial health and viability of organizations of all sizes and industries. To demonstrate how it works in practice, let’s look into the reasons why it’s crucial to maintain a strong credit profile for your business and the consequences a low score might result in.

Benefits of a Good Credit Score for Your Business

• Access to Financing: With higher scores, your company has higher chances of approval when applying for different credit products to obtain additional financing from banks and other financial institutions.
• Stronger Supplier Relationships: A positive score makes it easier for companies to qualify for more favorable payment terms, larger limits, and discounts on purchases.
• Lower Insurance Premiums: A higher business credit score may result in lower premiums for commercial policies, as it indicates lower risk and a greater likelihood of fulfilling insurance obligations.
• Extended Business Opportunities: Companies with favorable profiles are perceived as trustworthy and reliable partners, making them more attractive to potential collaborations, joint ventures, contacts, and investment projects.

Consequences of Poor Business Credit Rating

• Financing Struggles: Poor credit can limit a business’s access to resources needed for day-to-day operations and growth initiatives. Banks might deny loan applications or lend money at higher costs. Suppliers might limit credit lines, and there will be fewer opportunities to pursue profitable business partnerships or contracts.
• Reputational Damage: A history of late payments, defaults, or financial distress can damage a company’s reputation and credibility in the marketplace, which can harm relationships and hinder future business opportunities.
• Regulatory Issues: In severe cases, bad credit can lead to legal issues, such as lawsuits, creditor actions, and even bankruptcy proceedings. Such consequences can have long-lasting implications for the business and its stakeholders.

How to Boost Your Score

Given the importance of the credit score for your business’s ongoing operations and perspectives, it’s vital to maintain a positive rating to position your company for growth and success. Here are some key strategies you can follow:

• Consistently make payments by their due dates. To avoid missing deadlines and falling out of schedules, set up reminders or automate payments.
• Aim to keep your outstanding debt low compared to your available limits. Work on paying down existing debt and refrain from maxing out your credit lines.
• Regularly check your report for any errors or inaccuracies, and quickly address any discrepancies to ensure they are corrected.
• Split your personal and business finances. Use separate credit cards for business expenses and make timely payments in full each month to demonstrate creditworthiness.

Conclusion

The importance of a positive business credit score cannot be overstated. A strong profile can enhance your company’s financial stability, credibility, and access to opportunities for growth and success in the competitive marketplace.