The ins and outs of business credit scores
Learn the basics of your business credit score, and the role it plays in securing funding.
You're probably familiar with your personal credit score, but what about your business credit score? It can help determine whether you get favorable interest rates and payment terms or whether a lender will extend credit to you at all.
Here are some questions to keep in mind when reviewing your business credit score and profile:
What factors make up a business credit score?
Your business will begin building a credit score when you establish business credit with a financial institution or supplier that reports to one of the commercial credit reporting agencies. A business's credit report and score are based on several factors that show a lender how likely you are to pay your bills on time, says Mark Estes, vice president of Commercial Product Management at Equifax.
Lenders may consider:
The number of credit accounts a business has and uses
Whether a business pays its bills on time — and if late, how late
Whether the business has any property leases
How the business's payment history compares to other businesses in its industry, and whether trends in the industry show business growth or high rates of losses.
It's important to remember that a business credit score isn't based only on banking history. These scores also include your history of trade credit, meaning the accounts payable your business creates when purchasing goods and services from another business, as well as the accounts receivable created if you extend credit to your customers.
Many vendors report payment history to the commercial credit reporting agencies. This means if you aren't paying your bills on time, the lenders are likely to hear about it, says Estes.
Though your business and personal scores are two different numbers, lenders often use them both as a gauge of your financial situation. "Sometimes lenders use blended scores to predict the likelihood that you'll pay your debts," says Adam Fingersh, senior vice president and general manager of Experian's Fraud and Identity Business.
Who tracks business credit?
According to Estes, these organizations will factor business data into their credit reports to get an idea of the size, reach, and longevity of the business. This may include:
The address of all business locations
The number of employees
The length of time in business
Monthly, quarterly, and/or annual revenues
Using this information, they each leverage their own methodology and algorithm to define a business's credit score. Your resulting number can indicate high risk, very low risk, and everything in between.
How do you pull your business credit score?
You'll need your business's name, address, and phone number at the ready. Then visit one of the major credit bureau websites. Once there, choose the option that fits your information needs and budget. Each link will take you to a webpage where you can enter your company's information and pull a credit score report. Accessing your report from these agencies will likely cost money with prices ranging from a basic, one-time report fee to a yearlong subscription for as many reports as you'd like.
What does a business credit score say?
Generally, the higher your score, the greater the probability you'll receive the amount of credit you want at a competitive rate, says Joseph Schmidt, vice president in the Small Business Lending division at Wells Fargo.
"As that number goes down, the size of your credit line will likely go down, and your interest rates will likely go up," Schmidt says.
However, each lending institution places a different value on these scores. "The score is just one attribute in the profile that we use to determine whether to give a business credit, how much credit to offer, and at what rate," Schmidt says.
Estes cautions that unlike personal credit scores, there is no standardized range for good or poor business credit. "You don't want to get hung up on the actual number because different scores don't all translate exactly the same way," he says.
Instead, take a holistic view of your financial history and consider how all of your behaviors — past and present — might impact your financial profile. Then, aim to do whatever you can to make changes moving forward, which will help drive up your scores over time.
"You want to be sure you're doing everything you can to maintain a positive credit profile, so that when you need to leverage it, it's in the best possible shape," Fingersh says.
For more on how a lender looks at your credit history, watch our underwriter and a small business expert discuss credit history and the 5 Cs of credit.