Tools & Tips

Business Credit Score 101: Key Things to Know

Like most entrepreneurs, you’ve worked hard to get your business off the ground.  You’ve made investments, hired the right people, and grown and scaled successfully. Perhaps you are now ready to take it to the next level and are considering applying for financing or opening a trade account with a supplier. Before you jump in, however, it is essential to take an in-depth look at your business credit score, as this score could have a substantial impact on the funding options available to you as a small business owner.

What is a Small Business Credit Score?

Like a personal credit score, your business credit score helps funders, insurance companies, and vendors evaluate the risk and creditworthiness of your company. Like your personal credit score, a business credit score provides a snapshot of your company’s estimated ability to meet its financial obligations. From the perspective of the evaluators, this score approximates the overall financial health of your business.

Put simply, a higher business credit scores gives these institutions good reason to want to work with you (and the data to back it up).

Keeping tabs on your business credit score is critical regardless of whether securing financing is in your future. This score may also determine your business insurance premiums and lease rates, and it can affect your terms with partners and vendors.

How is a Business Credit Score Different than a Personal Credit Score?

Most entrepreneurs are familiar with the predictive analysis system known as the FICO score that is used in the realm of personal credit. But how does this differ from a business credit score?

While both types of credit scoring models have a similar purpose, they are completely independent from one another and rely on distinct inputs. Just like you can have multiple personal credit scores, so too can a company have more than one business credit score. This is due to the various number of credit scoring models and providers, which we will outline in the next section.

Keep in mind, however, that a personal credit score and a business credit score measure different components and are calculated uniquely based on the provider.

Who Provides Small Business Credit Scores?

There are three major providers of small business credit scores:  Experian, Equifax, and Dun & Bradstreet. Most people are familiar with Experian and Equifax given that these providers are also among the leaders in personal credit scoring. Dun & Bradstreet has also built a trusted name for itself in the business credit scoring market and it offers a few unique ratings for small business credit files. In addition, PayNet provides business credit scores based on its proprietary database of several factors.

Each of these companies calculate a small business credit score using proprietary algorithms that take into account many factors.  Below is a brief summary of each of these credit agencies’ processes and services.

  • Dun & Bradstreet (D&B):  Known for their PAYDEX report, which uses a 100-point scale to rank your business credit, D&B gathers analytics on the one-year payment history of your business and at least four vendors. They include a Financial Stress Score, Delinquency Predictor Score, Supplier Evaluation Risk Rating, Credit Limit Recommendation, and a D&B Rating.
  • Equifax:  Equifax ranks business credit scores in two different ways – in a range of 101 to 992 for the Small Business Credit Risk Score for Financial Services and a range of 101 to 816 for the Small Business Credit Risk Score for Suppliers. These scores are calculated by collecting a company’s demographics, payment history, public records, personal credit score, and credit utilization ratios.
  • Experian: Experian ranks a business credit score on a range of 1 to 100. Similar to the factors that Equifax uses to calculate a small business credit score, Experian also incorporates data from lenders and vendors that have loaned your company money or extended trade payment terms. They then compare and assess that data to peers in your company’s industry to complete your overall business credit score.
  • PayNet: PayNet relies on its proprietary database of commercial leases, lines of credit, and small business loans to create a small business credit score (known as the PayNet MasterScore) ranging from 550 to 740. Among the many factors that the agency incorporates into the MasterScore are a company’s time in business, borrowing experience, payment performance and delinquency history, and industry segment.

How is a Small Business Credit Score Calculated?

A variety of input factors are considered when calculating a small business credit score.  As mentioned in the previous section, each credit bureau makes use of its own exclusive formula to prepare a small business credit score.

Based on your company’s payment history, revolving credit card history, vendor invoices, and public records (including tax liens and bankruptcies), all models analyze historical information to provide anywhere from three to six different ratings that are used to indicate your company’s financial credibility.

How Do I Establish Business Credit?

Taking time to get organized properly and professionally is a fundamental aspect of running any successful small business. Get started on the right foot by taking these essential steps to establish – and build – your business credit.

  1. If you haven’t already, apply online for a federal EIN (an employer identification number). This number identifies your business entity and is offered free by the IRS.
  2. Research your options for filing an official business structure. Whether you form a LLC or incorporate your business, doing so will help to maintain a separation between your business and personal entities.
  3. Get a DUNS number by registering online with Dun & Bradstreet. This registration is free and will be used to identify the physical location of your business.
  4. Keep your personal and business finances and expenses separate by applying for a business credit card and opening a business bank account. Make sure you use your legal business name when applying for these accounts.

How Do I Build a Business Credit Score?

Like a personal credit score, it is imperative that a small business owner focus on making payments to creditors and vendors in a timely manner. While paying on time is most important, some experts even advise making payments early.

Just as importantly, be sure to build your credit by utilizing your credit cards and credit lines, but don’t max them out or exceed the limits. Exerting financial responsibility with lines of credit is a key factor in your business credit score and it’s often recommended to curtail credit card spending to approximately 20% of your limit.

Another way to positively impact your small business credit score is to proactively establish a trade line account with vendors or suppliers. This is the process by which suppliers extend you trade credit and allow you to receive inventory days or weeks prior to payment. Whether you purchase office supplies, building materials, or even water delivery for your office, a trade line can be a convenient and time-saving option for a small business. In fact, to receive a Dun & Bradstreet PAYDEX score, your business must have trade lines established.

Finally, be sure to keep all of your basic business information (such as address, number of employees, and financial statements) current and updated in the systems of the main credit bureau reporting agencies. You can easily maintain all this information online and doing so will help to avoid potential reporting mistakes with the bureaus.

Your Business Credit Score is in Your Hands

Building and understanding your small business credit score may be overwhelming at first. But there are several tools and resources available on each of the credit reporting agencies’ websites to help get you acquainted with the process.

Ultimately, you have control over your business credit score by ensuring you routinely make sound business financial decisions. Request your small business credit scores on a yearly basis to stay up to date on your progress. Then, develop a strategy to stay on track.

Take it one step at a time and remain focused on maintaining a positive and healthy business credit score.