Business Credit Scores: The Complete Guide
As an adult, you’re likely aware of what a personal credit score is, how it’s used, and why it’s important. From applying for a mortgage to renting an apartment to applying for a loan or credit card, your credit score is a reflection of your creditworthiness. A high personal credit score shows that you’re a lower risk, opening up more doors to funding, as well as better interest rates and terms. On the other hand, a low personal credit score shows that you’re a bigger risk, resulting in higher interest rates, less favorable terms, and even declined applications.
When applying for business loans or other sources of funding, personal credit score often comes into play. However, there’s also another credit score that you also need to know: your business credit score.
In this post, we’re going to explain your business credit score and whether or not it is important (spoiler alert: it is). We’ll also look at the different types of business credit scores, how they’re calculated, and how you can access yours.
Whether you currently own your own business or you’ve been toying with the idea of becoming an entrepreneur, read on to learn everything you need to know about business credit scores.
Table of Contents
What Is A Business Credit Score?
A business credit score is a measure of the creditworthiness of your business. Instead of using your personal accounts and payment history, your business credit score is based on the accounts and payment history of your business.
Your business credit score is a reflection of the riskiness of your business. Lenders, insurance companies, and even vendors may take your business credit score into account when determining whether to approve a loan, underwrite an insurance policy, or provide you with a credit account.
A higher credit score means that you’re a more creditworthy borrower that makes payments on time. This makes your business less of a risk. On the other hand, a low business credit score may indicate that you’ve had trouble paying off your debts in the past, making you a risky borrower.
Business VS Personal Credit
Business and personal credit scores are similar in that they represent creditworthiness. However, there are a few distinct differences between the two.
The primary difference is that your business credit score measures the creditworthiness of your business. Your personal score measures your individual creditworthiness based on your personal accounts. For example, a business credit card in the name of your business affects your business credit score, while a personal credit card in your own name is reported on a personal credit report.
Another difference is how these credit scores are calculated. While we’ll go into more detail on this a little later, your business credit score takes factors into consideration that don’t affect your personal credit score. This includes your time in business, your industry, and the number of people your business employs.
Your permission is required before a business or individual can pull your personal credit score, but the opposite is true of business credit scores. Business credit scores are considered public information, so your permission is not required.
Is My Business Credit Score Important?
Your business credit score is important, especially when you open an insurance policy, apply for a business loan, or try to obtain credit. Lenders, vendors, and insurance agencies typically pull your business credit score.
Your business credit score not only determines if your policy or financial product is approved, but it’s also used to score lower rates on insurance policies, more favorable terms for loans, and open up higher borrowing limits.
If your business credit score is low or non-existent, you may not qualify for certain financial products. Your insurance rates may be higher, your borrowing limits lower, and your rates and terms on loans not as favorable. This is why it’s important to boost and maintain your business credit score.
If you own a business, you most likely have a personal bank account as well as a business account. Establishing a business credit profile is another way to keep your business and personal expenses separate. While it may not seem like a big deal now, you’ll be grateful for the separation come tax time.
One final thing to note is that while having a high business credit score is important, it’s not the only factor that lenders and others will use to assess your creditworthiness. Debt-to-income ratio, annual revenue, and personal credit score may also be used in addition to your business credit score and report.
How The Three Credit Bureaus Calculate Your Score
There isn’t just one credit bureau that tracks your business credit score. While there are many companies to choose from, there are three that most business owners utilize: Experian, Equifax, and Dunn & Bradstreet. There is no standardized measurement for business credit scores, and each credit bureau uses its own methods for calculating risk. Each company also has its own credit scoring model. Let’s take a look at what to expect with each of the three credit bureaus.
Experian collects information from your payment history, public records about your business, and demographic information to calculate a Credit Ranking Score (sometimes called the Intelliscore Plus). This score ranges from 1 – 100, and is used to predict how likely you are to pay on time.
In this case, higher is better. A score of 76 – 100 indicates that your business settles debts on time. Scores below that indicate various gradations of risk.
A credit report from Experian also includes other information about your business like your average days beyond term (which indicates how many days late you generally make payments), how many UCC filings and liens you have, how many inquiries have been made on your report, and other information. Here is a sample report from this company.
Equifax has a score called the Payment Index. Unlike Experian’s Intelliscore, Equifax’s score only takes past payment history into consideration. Once again, the scale runs from 1 – 100. A score of 90 or above indicates that you’ve been paying your suppliers on time, and anything below that indicates how late, on average, your payments have been.
The Payment Index is not supposed to be a predictor of future performance, though. For that, Equifax has two other scores: the Business Credit Risk Score, and the Business Failure Score.
The Business Credit Risk Score is an indicator of how likely you are to become more than 90 days past delinquent on your debts. This score falls on a scale that ranges from 101 – 992. A higher score indicates less risk.
As you’d expect, the Business Failure Score indicates how likely your business is to fail or go bankrupt within the next 12 months. The scale ranges from 1,000 – 1,880. Once again, the higher your score, the lower your chances of business failure.
Dun & Bradstreet
D&B measures risk with its PAYDEX score. Like Equifax’s Payment Index, the PAYDEX score aggregates how well you paid off your debts in the last year. The score ranges from 1 – 100, with higher scores indicating a better payment history.
- 80 – 100 is a low risk of late payments
- 50 – 79 is a medium risk
- 0 – 49 is a high risk
More detailed credit reports also include a Commercial Credit Score and a Financial Stress Score.
The Commercial Credit Score ranges from 101 – 670, and predicts how likely you are to become extremely delinquent or default on your loans in the next year. A lower score indicates a higher risk of delinquency.
The Financial Stress Score predicts how likely your business is to fail within the next year. This number ranges from 1,001 – 1,875, with a lower number indicating a higher risk of failure.
To see a sample of D&B’s credit reports, head over to their website.
Where To Get Your Credit Score
By now, you should have an understanding of business credit scores, as well as why you need to know yours. The next step, then, is to pull your scores to see where you stand, then take steps to boost or maintain your business credit rating.
Before you get started, make sure that you have your Employer Identification Number, or EIN. This number can be obtained for free through the IRS and is used for tax purposes. If you already have an EIN, it’s likely that you already have business credit profiles available through Experian and Equifax.
To receive your Dun & Bradstreet credit profile, you must apply for a nine-digit D-U-N-S number. You can apply through the D&B website at no cost unless you opt to expedite the process for an additional fee.
While there are free options for obtaining your personal credit score and report, unfortunately, credit bureaus are not legally obligated to provide you with a free business credit score or report. However, there are plenty of affordable services available when you want to see where your business credit stands. Note that while some services allow you to sign up at no cost and may provide some features, you will be required to pay a one-time fee, monthly subscription fee, or annual fee to take full advantage of these services.
|Business Credit Score Service||What It Offers||Price|
Premium Plus: $49.99/month
|Dun & Bradstreet’s CreditBuilder Plus||
|Experian’s Business Credit Advantage Plan||
How To Improve Your Business Credit Score
As previously discussed, maintaining a high business credit score is necessary to receive for the best interest rates, the lowest insurance premiums, and to open up more funding opportunities for your business. To improve your business credit score, the first step is to make sure that you’ve established credit with the big three (Experian, Equifax, and D&B). You also need to apply for your EIN and D-U-N-S number if you haven’t already.
Don’t stop there, though. In order to get your company on the radar of the credit bureaus, you must have open accounts specifically for your business. This could include your business phone line, business credit cards, and your business bank account. Opening a tradeline with a vendor is an easy way to raise your score, provided you make your payments on time. Your credit score could also get an additional boost when you pay off your debts early.
Small business loans can also help lift your credit score when paid as agreed or paid off early. However, if you haven’t yet established business credit, your business loan options may be limited. Consider applying for a line of credit or another form of funding that doesn’t require a business credit score to improve your credit profile. Also remember that not all lenders report to the credit bureaus, so ask the lender before accepting the offer.
Finally, monitoring your business credit is a smart move for business owners. This allows you to track your progress, as well as identify errors that are dragging your score down.
Learn more about ways to raise your score in our post, The Ultimate Guide To Improving Your Business Credit Score.
Whether you’re ready to expand, need a low-interest loan, or plan to grow your business in the future, having a solid business credit score is a must. A solid business credit score equals more funding opportunities and big savings with lower interest rates and insurance premiums. If you haven’t yet established a business credit history or your score is low, simply use the tips we’ve provided to get on the right track. Good luck!