The world as we know it depends on credit. You need good credit to make major purchases, like a home or car. And for businesses, good credit is crucial to expanding operations.
As a small business owner, your credit impacts your ability to access the cash you need to run and grow your company. That’s why you need to understand it inside and out. While both personal and business credit scores affect your company’s credibility, they are different.
To take full advantage of the opportunities good business credit provides, read through the following guide. It has everything you need to know.
1. Why do personal credit scores matter?
When it comes to getting small business loans, business credit cards, a line of credit, and other funding—your personal credit score isn’t just ‘personal.’ To many lenders, your personal credit score indicates how responsible you’ll be with money as a business owner.
If you’ve just started your company, your personal credit score will carry even more weight. For many lenders, it could be the deciding factor for whether they fund your business.
That’s why Tom Gazaway, a small business funding expert, says that you should “do everything you can to protect, preserve, and improve your credit profile.” A good score means “your chances of getting approved for a small business loan will increase measurably.”
2. How do you improve your personal credit score?
To improve your personal credit score, know how it’s calculated. Then find out where you stand and take steps to improve it.
Here’s how FICO® determines your personal credit score:
- Payment history (35%): Do you pay your bills on time?
- Amounts owed (30%): What is your credit utilization ratio?
- Length of credit history (15%): How long have your credit accounts been established?
- Credit mix (10%): Do you use a variety of forms of credit, like credit cards, auto loans, student loans, etc.
- New credit (10%): Have you opened new credit accounts recently? This may show greater risk to lenders.
FICO® Score 8 ranges from 300 to 850 (the higher, the better). Ideally, you want to be at 740 or higher, which means lending to you is low-risk. If you’re between 620–740, you’ll still find many lenders willing to loan you money, as you’re only a medium-risk borrower. A score below 620 may make it tough to borrow, though you do have alternative funding options.
To boost your personal credit score and keep it in good shape, make payments on time, keep balances low, and only open new credit lines when necessary. With time, your personal credit will steadily improve your company’s ability to borrow.
3. What is a business credit score?
Like personal credit scores, business credit scores tell lenders just how risky it is to lend to a certain company. Business credit scores only include company activity, but most lenders still check the personal credit scores of owners.
While only you can see your personal credit report, business credit reports are public. This enables other businesses and lenders to quickly see if you’re a trustworthy borrower or partner.
Unlike with personal credit scores, where Fair Isaac’s FICO® score is widely considered the industry standard, there is no standard algorithm for determining business credit scores. But lenders check similar data, like loan history with banks, business credit card balances, and payments to vendors.
4. Who calculates your business credit score?
When you start a company as an LLC or corporation, you get an employee identification number (EIN) from the IRS. You can use your number to look up your business credit score with one of the three credit bureaus, which are:
- Dun & Bradstreet
Another source lenders may use to determine your borrowing worthiness is the FICO® Small Business Scoring Service (SBSS). This service pools a wide range of data and gives businesses variable models to use for different types of credit, such as line of credit transactions, term loans, and commercial credit cards.
As a small business owner, it’s vital to understand how these three bureaus calculate your score. Here’s a summary of how the three main bureaus do it:
Dun & Bradstreet
With Dun & Bradstreet, businesses apply for a DUNS number, or 9-digit identifier that’s used to establish a business credit file. This number can be used by potential business partners or lenders to check your reliability and financial stability.
To calculate your business credit score, Dun & Bradstreet uses its PAYDEX score, which ranges from 1–100. A higher score signifies that you’re a more trustworthy borrower. A score of 100 indicates a perfect payment history.
Here’s a general breakdown of the PAYDEX score categories:
- 80 and above: Low-risk borrower.
- 50–79: Medium-risk borrower.
- 49 and below: High-risk borrower.
Dun & Bradstreet gets its data from trade experiences reported by various vendors and partner organizations that collect data. Scores are calculated using info from the past 12 months and are dollar-weighted. For instance, if you pay a $10,000 bill to a web design company on time, it will help your score much more than paying a $300 bill to a cleaning company.
To improve your Dun & Bradstreet score, be sure to pay big bills back promptly. Also, if you have a good relationship with suppliers, see if they’re reporting your positive financial actions to Dun & Bradstreet; if they’re not, you can add positive trade references and improve your score.
Dun & Bradstreet also provides a Financial Stress Score with its business credit report. The Financial Stress Score ranges from 1 to 5, with a lower score being better. A score of 1 indicates the least possible financial stress, while a score of 5 indicates the most possible financial stress.
Experian collects three types of data to come up with a company’s credit score, which are:
- Credit: Data includes trade experiences, current balances outstanding, payment history, and credit utilization. Trends over time are considered.
- Public Records: Liens, judgments, or bankruptcies are factored (if applicable), with the recency, frequency, and dollar amount calculated as well.
- Demographic Information: Business size and years with a credit file are examined. Your Standard Industrial Classification (SIC) code, a 4-digit number that represents your industry area.
With this data, a statistically derived algorithm determines your Experian credit score. The actual number is called your company’s Intelliscore PlusSM, which ranges from 1–100.
Experian’s scoring model takes into account over 800 variables, making it quite comprehensive. To keep your score in good shape, focus on making payments and keeping low balances. Over time, your score will only improve.
Also, Experian provides a Financial Stability Risk ScoreSM, similar to Dun & Bradstreet’s Financial Stress Score. It has five risk classes. This score is designed to show if businesses are at risk of payment default and/or failure.
Equifax provides two scores in its business credit report:
- Equifax Credit Risk Score™: This score shows your reliability as a borrower. It ranges from 101–992, with a higher score being better (less risk).
- Equifax Business Failure Score™: This score predicts the likelihood of failure due to bankruptcy within the next year. It ranges from 1000–1610, with a higher score being better (less risk).
For your credit risk score, your business size, credit utilization ratio, payment history, and trade experiences are all factored. Paying bills on time and maintaining low outstanding balances will improve your score with Equifax.
5. How to check your business credit score
While you can get a personal credit report for free once a year, your options are quite limited for obtaining a free business credit score. You can check Equifax, Experian, or the Dun & Bradstreet websites for paid reports (but you’ll get your report quickly).
It’s absolutely essential that you stay updated on your business credit score. If you have to pay for a report, do so once or twice a year. It won’t be a huge expense and it will give you a clear picture of your ability to access credit.
Making personal and business credit work for your company
If you’re just beginning, take care of your personal credit. It plays a big role in determining your company’s reliability as a borrower. Over time, you can work on improving your business’ credit score as well.
A good business credit score proves your company is financially stable and trustworthy as a borrower. That means it will be much easier to access the capital you need to make your business a sustainable success.