What Is a Good Business Credit Score?
In the business world, credit’s importance extends beyond individual finances. Business credit, a distinct financial entity, plays a huge role in determining the health, growth, and opportunities available to a company. From accessing crucial financing to making fruitful partnerships, understanding the value of business credit is a basic part of effective financial management for any enterprise. Ecwitty tells you how, so keep reading!
What is a Business Credit Score
Starting a business includes learning about essential things such as business credit scores.
Think of a business credit score like a report card for your company’s financial health. It’s kind of like your personal credit score but for your business. When lenders, suppliers, or potential partners want to work with your company, they check this score to understand how reliable and stable your business is.
The score takes into account things like whether you pay your bills on time, how much debt your business owes, and how responsibly you use credit. A higher business credit score is like getting an ‘A’ on your report card – it means your business is seen as less risky, which can lead to better deals and opportunities!
Benefits of a Business Credit Score
Credit scores are used in various ways to assess an individual’s or business’s creditworthiness and financial responsibility. Here are some common ways in which credit scores are used. Let’s explore how the benefits of a strong business credit score can help a company with a specific case scenario for each:
Access to Financing
ABC Construction wants to bid on a high-value construction project that requires them to invest in specialized equipment. Their strong business credit score allows them to secure a $500,000 equipment loan at a competitive interest rate. With this financing, they win the bid and complete the project successfully, leading to a significant profit.
Lower Borrowing Costs
Tech Startup Innovate needs working capital to fund research and development. Thanks to their excellent credit score, they obtained a business line of credit with a low interest rate of 4%. This low-cost funding enables them to develop a groundbreaking product, which attracts investors and catapults their growth while having a higher small business success rate.
Improved Supplier Relationships
Eco-Friendly Home Builders has a strong company credit score. Their lumber supplier offers them net-90 payment terms. This extended payment window allows them to manage cash flow efficiently, purchase materials in bulk, and take on larger construction projects, ultimately increasing their revenue.
Global Exporters Inc. aims to expand its export business to new markets. Their high credit score helps them secure a substantial business loan with favorable terms. They use the funds to establish distribution networks in multiple countries, significantly increasing international sales.
Better Leasing Terms
Auto Rental Ventures leases a fleet of vehicles for their rental business. Due to their strong credit score, they negotiate a lease agreement with reduced monthly payments and lower insurance premiums. This enables them to offer competitive rental rates and attract more customers.
Tech Solutions Provider competes in a crowded IT services market. Their high credit score gives them an edge when pitching to a major client. The client chooses them over competitors with weaker financial profiles, citing trust and reliability as key factors.
Healthcare Innovators seeks a partnership with a prestigious medical research institution. Their solid credit history reassures the institution that they can financially support collaborative projects. As a result, they entered into a long-term research partnership, boosting their reputation and research capabilities.
What is a Term Loan Example?
A strong business credit score acts as a critical enabler for various aspects of business growth, from winning contracts and expanding operations to attracting investors and building trust with partners and stakeholders. It enhances financial stability, lowers costs, and provides opportunities for strategic development.
A term loan is a type of loan where a borrower receives a lump sum of money upfront and repays it over a predetermined period with a fixed interest rate. Here’s an example to illustrate how a term loan works:
Bright Ideas Inc. is a small tech startup that needs to purchase new computer equipment to expand its operations. They apply for a $50,000 term loan from a bank to finance this equipment.
Terms of the Term Loan
- Loan Amount: $50,000
- Interest Rate: 6%
- Loan Term: 3 years
- Repayment Frequency: Monthly
- Monthly Payment: $1,516.94 (calculated using an amortization schedule)
- Total Number of Payments: 36 (3 years x 12 months)
How it Works
- Loan Approval: Bright Ideas Inc. gets approved for the $50,000 term loan based on their creditworthiness and business plan.
- Funds Disbursement: Once approved, the bank disburses the entire $50,000 to Bright Ideas Inc., which they use to purchase the computer equipment they need.
- Repayment Begins: The company starts making monthly payments on the loan, beginning one month after receiving the funds.
- Fixed Monthly Payments: Each month, they repay $1,516.94, which includes both principal and interest. In the beginning, a more significant portion of each payment goes toward interest, but over time, more goes toward reducing the principal balance.
- End of Loan Term: After 36 months (3 years), Bright Ideas Inc. has successfully repaid the entire $50,000 loan, plus interest. The loan is fully paid off.
Differences Between Personal and Business Credit Scores
Personal and business credit scores are distinct in several ways. Here are the key differences between them:
- Personal Credit Score: Personal credit scores assess an individual’s creditworthiness and financial responsibility. They are used for personal financial transactions, such as applying for personal loans, credit cards, mortgages, or renting an apartment.
- Business Credit Score: On the other hand, business credit scores evaluate a company’s creditworthiness and financial stability. They are used for business-related transactions, including obtaining business loans, credit lines, supplier agreements, and partnerships.
- Personal Credit Score: Personal credit scores are based on an individual’s personal financial history, including credit cards, personal loans, mortgages, and other personal financial activities. Personal credit bureaus like Equifax, Experian, and TransUnion compile this information.
- Business Credit Score: Business credit scores rely on a company’s financial data, such as its payment history with suppliers, business loans, and business credit cards. Business credit bureaus like Dun & Bradstreet, Experian Business, and Equifax Business collect and maintain this information.
- Personal Credit Score: Personal credit scores typically use scoring models like FICO or VantageScore to calculate a credit score. These models consider factors such as payment history, credit utilization, length of credit history, types of credit, and recent credit inquiries.
- Business Credit Score: Business credit scores often use different scoring models tailored to assess businesses’ creditworthiness. These models take into account factors like payment history with suppliers, trade credit, public records, and business size.
- Personal Credit Score: Personal credit scores are subject to consumer protection laws like the Fair Credit Reporting Act (FCRA) in the United States. Individuals have certain rights and can dispute inaccuracies in their personal credit reports.
- Business Credit Score: Business credit scores are not subject to the same level of legal protection as personal credit scores. Businesses may have fewer rights and recourse options in case of errors or disputes in their credit reports.
Impact on Individuals vs. Businesses
- Personal Credit Score: An individual’s personal credit score directly affects their personal finances, including their ability to secure personal loans, credit cards, and mortgages. It can also influence the interest rates and terms offered to them.
- Business Credit Score: A business’s credit score primarily impacts its ability to access business financing and credit. It can affect the terms of business loans, supplier relationships, insurance premiums, and contracts. It typically does not involve an owner’s personal credit score directly unless they personally guarantee business debts.
How are Business Credit Scores Calculated?
“How is business credit score calculated?” you ask. Well, business credit bureaus calculate a business credit rating using various factors that assess a company’s creditworthiness and financial stability. Common financial mistakes include not understanding how credit scores are calculated. While the specific algorithms and models used by credit bureaus may vary, here are some common factors that typically influence the calculation of a business credit score:
- Payment History: This is one of the most significant factors. It assesses whether a business pays its bills on time. Late payments or a history of missed payments can negatively impact the score.
- Credit Utilization: Similar to personal credit scores, business credit scores consider the ratio of credit used to the total available credit. High credit utilization can be seen as a risk factor.
- Credit History Length: The length of time a business has been using credit is taken into account. A more extended credit history can positively affect the score.
- Public Records: Information from public records, such as bankruptcies, liens, and judgments, can significantly lower a business’s credit score.
- Industry Risk: Some models consider the industry in which the business operates. Initiatives with higher risk factors may lead to adjustments in the credit score.
- Size and Revenue: The size and revenue of the business may be considered. Larger businesses with higher revenue may have different scoring criteria than smaller businesses. Legal Structure: The legal structure of the business, such as whether it’s a sole proprietorship, LLC, or corporation, can sometimes impact the credit score.
- Credit Inquiries: The number and frequency of credit inquiries made by the business can affect the score. Multiple inquiries within a short period might be viewed as a sign of financial stress.
- Financial Statements: The credit bureaus may consider financial statements and reports, including balance sheets, income statements, and cash flow statements.
- Trade References: Information from suppliers and trade partners may be used to assess the payment behavior and reliability of the business.
How to Improve your Business Credit
Establish a Business Entity
Forming a distinct legal entity for your business, such as an LLC (Limited Liability Company) or corporation, creates a clear separation between your personal and business finances and helps in business sustainability. This separation is essential for protecting your personal assets in case your business faces legal or financial challenges. To improve your creditworthiness, make sure you complete all the necessary legal paperwork and registration requirements for your chosen business structure in your jurisdiction.
Open a Business Bank Account
Opening a dedicated business bank account is good practice and a crucial step for financial separation. This account allows you to keep your business income and expenses separate from your personal finances.
To improve your business credit, consistently use this account for all business-related transactions. Avoid mixing personal and business funds, as doing so can confuse your financial records and potentially harm your credit profile.
Apply for a D-U-N-S Number
A Data Universal Numbering System (D-U-N-S) number is a unique identifier assigned by Dun & Bradstreet (D&B) to your business. While having a D-U-N-S number doesn’t directly impact your credit score, it’s essential for building a business credit profile with D&B, one of the central business credit bureaus. To improve, apply for a D-U-N-S number through D&B’s website and keep it on record for future credit-building activities.
Establish Trade Credit
Trade credit involves obtaining goods or services from suppliers or vendors on credit. To improve your business credit, start by working with smaller suppliers or vendors who are more likely to extend trade credit to newer businesses.
Consistently pay these bills on time or even ahead of schedule to establish a positive payment history. Over time, as your credit profile strengthens, you can work with larger suppliers who report payment history to credit bureaus, further enhancing your credit score.
Get a Business Credit Card
Applying for a business credit card is an effective way to build and improve your business credit. Choose a business credit card with favorable terms, low fees, and benefits that align with your business needs.
To improve your credit score, use the card responsibly by making on-time payments and keeping your credit utilization (the percentage of credit used compared to your available credit) low. A lower credit utilization rate demonstrates responsible credit management.
Monitor Your Credit Report
Regularly monitoring your business credit reports from major credit bureaus such as
- Dun & Bradstreet
- Experian Business
- Equifax Business
Monitoring allows you to identify any errors, inaccuracies, or potential issues that can negatively impact your credit score. To improve your creditworthiness, promptly dispute and correct any inaccuracies you find.
Pay Bills Promptly
Your payment history is one of the most influential factors in your business credit score. To improve it, make it a priority to pay all business-related bills, loans, and credit card balances on time or even ahead of schedule. Consider setting up reminders or automatic payments to ensure you never miss a due date and avoid bankruptcy. Consistently meeting payment obligations demonstrates your financial responsibility!
Manage Credit Utilization
Maintaining a close watch on your credit utilization ratio is crucial. This ratio measures the percentage of your available credit that you’re currently using. Aim to keep your credit utilization below 30%, as it indicates responsible credit management. To improve your business credit, effectively manage your credit utilization by avoiding maxing out your credit lines and regularly paying down outstanding balances.
How To Build Good Business Credit
Building a good credit score while managing a small business is essential for accessing favorable financing terms, attracting investors, and establishing trust with suppliers and partners. Here’s a step-by-step guide on how to build strong business credit:
- Open a Business Bank Account: Open a dedicated business bank account in your company’s name. Use it exclusively for business transactions to maintain financial separation.
- Establish a Business Credit Profile: Establish trade credit with suppliers or vendors willing to extend payment terms to your business. Make sure they report your payment history to business credit bureaus.
- Diversify Your Credit Mix: Consider a mix of credit types, including trade credit, microloans, small business loans, commercial loans and business credit cards. Diversification can positively affect your credit profile.
- Build a Positive Payment History: Focus on consistently making on-time payments. A track record of responsible payments is crucial for a strong credit profile.
- Maintain Financial Records: Keep accurate financial records, including balance sheets, income statements, and cash flow statements. Well-organized financial records demonstrate financial stability.
- Work with Suppliers Who Report: Establish relationships with suppliers and vendors who report your payment history to business credit bureaus. This ensures that your positive payment behavior is reflected in your credit profile.
- Avoid Over-Leveraging: Be cautious about taking on too much debt. Avoid over-leveraging your business, as excessive debt can negatively impact your creditworthiness.
- Seek Professional Guidance: If needed, consider consulting with professionals who specialize in business credit. They can provide guidance on specific strategies to improve your business credit score.
Building good business credit takes time and consistent financial responsibility. By following these steps and maintaining a positive credit history, you can strengthen your business credit profile and access better financing opportunities in the future.
Why Is Business Credit Important?
Business credit is essential for several reasons, as it plays a critical role in the financial health and growth of a business. Here are key reasons why business credit is vital:
Access to Financing
Business credit is a crucial factor when applying for unsecured business loans, business line of credit loans, or business credit cards. A strong business credit profile can lead to better financing terms, lower interest rates, and higher credit limits. This means more accessible access to capital for growth, working capital, or unexpected expenses.
With good credit, businesses can expand more efficiently. They can invest in new equipment, hire additional employees, open recent locations, or launch new products or services. This growth can lead to increased revenue and market share.
A favorable business credit profile can lead to better relationships with suppliers and vendors. Suppliers may be more willing to extend favorable payment terms, discounts, or access to valuable inventory. This can improve cash flow and overall business operations.
Businesses with strong credit profiles are more competitive. They can win contracts, secure partnerships, and attract investors more easily. Customers and partners often see good credit as a sign of reliability and stability.
Lower Borrowing Costs
Lenders see Businesses with good credit as less risky, resulting in lower interest rates on loans such as short-term loans, long term loans and credit lines. Lower borrowing costs can significantly impact a company’s profitability.
Business credit helps protect the personal assets of business owners. When a business has its own credit profile, creditors typically can’t pursue the business owner’s personal assets in case of business debts or liabilities.
Think of business credit as the key to a treasure chest for your business’s success. It’s the gateway to exciting opportunities, like getting the funds you need to grow, forming strong partnerships, and even saving money on loans like installment loans. When your business has a good credit reputation, it’s like having a golden ticket.
It means you can access funds more easily, gain the trust of suppliers, and even protect your personal finances. So, as a business owner, think of building and managing your business credit as an intelligent part of your financial game plan for a prosperous future with Ecwitty!
Frequently Asked Questions
Q1: What is a good business credit score?
A good business credit score range typically falls within 70 to 100 on the Dun & Bradstreet PAYDEX scale, which is one of the commonly used business credit scoring systems. Other credit bureaus may have their own scoring models with different ranges. Generally, a score above 80 is considered good and demonstrates a strong credit history.
Q2: How does business credit work?
Business credit works similarly to personal credit but is specific to a company. It involves building a credit profile for your business by establishing credit relationships with suppliers, lenders, and credit card companies. Your payment history, credit utilization, credit mix, and other factors contribute to your business credit score. Lenders, suppliers, and partners use this score to assess your creditworthiness and financial stability.
Q3: How is a business credit score calculated?
Business credit scores are calculated using various factors, including payment history with suppliers and creditors, credit utilization (the ratio of credit used to credit available), length of credit history, public records (such as liens or bankruptcies), and other financial data. Different credit bureaus may use their scoring models, but they all evaluate these elements to determine a business credit score.
Q4: Who tracks all of your credit information?
Several business credit bureaus track and maintain business credit information. Some of the major ones include:
- Dun & Bradstreet (D&B)
- Experian Business
- Equifax Business
- LexisNexis Risk Solutions
These bureaus collect data from various sources, such as trade creditors, lenders, and public records, to compile business credit reports and calculate business credit scores.