Most adults who are used to the American financial system are familiar with personal credit scores. Your personal credit history might start with your first college credit card or your first car loan. From then on, interest rates, utility bills, student loans, and so on go into building our credit reports. Some people keep a close eye on their credit reports from the beginning and others only pay attention when it’s time to apply for a loan or an apartment lease.
Business credit scores behave in much the same way, but the credit structure and which activities affect it are different. The more attention you pay to your business credit, the easier it is to source capital, and therefore to succeed as a business overall. It pays to keep on top of business credit from the beginning and keep a close watch on it month by month. At the start of building a business, it’s important to set up separate accounts as a business entity and keep them separate from your personal accounts. This not only helps build business credit, but it can also protect your personal credit from taking a hit when cash flow dips in your business cycle.
This article will focus on what business credit is, what affects business credit, and how your business credit score can affect your ability to get a business line of credit. It will also touch on the difference between credit building and credit repair and how to decide on a credit builder program. Finally, there will be recommendations for other financial products that can help build your business credit score.
What is a Business Credit Score?
Very simply put, a business’s credit score is a measurement of how likely a business is to pay back its debts. It’s used not only by lenders, but also suppliers, vendors, investors, and other financial institutions. So, it’s a good idea to keep a close watch on your score even if you’re not considering a loan. You have to start building credit before you can use it to get advantages for your business.
Your business credit score is a collection of several different records related to your business. It contains debt accounts, of course, but also your business’s annual revenue, expenses, number of employees, and credit utilization. On top of that, a credit record can also have public records (like legal rulings), news reports about your company, and any official complaints.
Having an “established” score typically means you have three business credit cards, two loans paid in full, and five “trade” credit accounts. Trade credit is also referred to as “net-30” credit, meaning a vendor account that gives you 30 days to pay. A few companies that offer net-30 accounts are Amazon, Staples, NewEgg Business, Grainger, and Supplyworks. There are many more, so check with the vendors and suppliers that you already work with and see if they’re reporting to the credit agencies.
Who Determines Your Business Credit Score?
Business credit records are kept by three main credit agencies. They are Dun & Bradstreet, Equifax, and Experian. Each of them has different methods of calculating your score and a lender may use one or more of these scores to determine a loan.
Dun & Bradstreet keeps track of both a PAYDEX Score and a D&B Delinquency Predictor Score. This agency’s scores range from 0-100 with 80-100 considered low risk and 0-49 considered high risk. The delinquency predictor uses a formula to calculate how likely your business is to default on its debts.
Experian has what’s called its Intelliscore Plus program. This rating system also ranges from 0 to 100. A low-risk score is between 76 and 100, a medium-risk score is 26 to 50, and a high-risk score is any number from 0 to 10.
Equifax’s rating system is somewhat less transparent and they have several rating systems. Unlike the other two agencies, Equifax rates on a scale from 101 to 992. Any score above 550 puts you in a good place with lenders.
In addition to those three, FICO scores businesses on a 1 to 300 scale, and the Small Business Administration uses yet another scoring system. How do you keep track of them all? Unlike your personal credit report, you can’t access your business credit for free. You can buy your business credit report from one of the top three agencies, but some reports are only accessible if you’re a lender. The fastest and easiest way to access the scores you need is through your loan broker.
How Does a Business Credit Score Impact financing, such as a Business Line of Credit?
Just like when you apply for other types of loans, LOC lenders look at your business and personal credit histories. The lower risk you appear to represent to these lenders, the higher your chances of being approved for a line of credit. You’ll also earn better rates with a higher score when you are approved.
Let’s look at a random sampling of three lines of credit:
● Line A offers anywhere from $10,000 to $250,000 depending on what you qualify for. The minimum requirements to qualify are 2+ years in business, $180K per year in revenue, and a personal credit score of 650.
● Line B can give you from $6,000 to $100,000 to borrow. Its minimums are 1+ years in business, $100K per year in revenue, and a personal credit score of 625.
● Line C has credit limits between $2,000 and $250,000. To qualify, you would need 1+ years in business, average monthly revenue of $3K, and a personal credit score of 660.
These base criteria are really the starting point for approval. If you don’t meet these criteria, lenders can look at other options. What personal assets such as a home or commercial real estate can you leverage? How has your business met its previous obligations? This is where business credit history comes in handy, and the higher the limits you pursue, the more important your business cash flow and credit history become. If there are a limited number of loans available, this number could make the difference between who gets the loan and who walks away empty-handed.
Something else to consider when it comes to the intersection of your business credit score and lines of credit is that a line of credit can help you build your credit score. It’s also a relatively easy way to do it. You can borrow a modest amount and pay it off quickly. Each month, your activity will get reported to the credit bureaus and improve your score.
A significant business line of credit (LOCs) can be extremely helpful for businesses because it allows them to hold less cash on hand for purposes like purchasing inventory, payroll, and similar expense items. Lines of credit are often compared to business credit cards because both are what’s referred to as “revolving credit,” meaning you can borrow from your account and make payments back to the account so you can borrow from the account again. The money you put into the account can come back out when you want to use it. The account stays open as long as you’re making payments on schedule.
The difference between a line of credit and a credit card is that lines usually offer more favorable terms and higher borrowing limits, and they can be applied to more expenses because, in most cases, business owners can draw cash to their checking account without additional fees or interest. While most credit cards are unsecured loans, a line of credit can be secured with a COD or blanket lien, giving you more borrowing power and the best interest rates. Unsecured lines of credit are available but may have lower borrowing limits and charge higher interest.
Businesses use lines of credit to manage cash flow. Instead of getting a lump sum disbursement that they later have to pay back, the business can have a line open to use whenever they need to. Repayment terms can be flexible and interest is only owed on the balance of the account. Carrying a lower balance means you pay less interest.
What is Credit Building vs. Credit Repair?
Credit building is what you do from the start of your business to build good credit. You can build credit through the ways already mentioned in this article, plus by keeping an eye out for misreporting and inaccuracies in your report. You can start building good credit before you even get a loan, but loans and debt accounts can help (if you stay current on your payments). Good business credit will show you’re a responsible business owner and garner better rates on insurance, equipment leasing, and lines of credit.
Credit repair is what happens after you’ve established credit and that credit takes a hit. It’s essentially a reactive response while credit building is more proactive. If you have too many credit applications in a short period, missed payments, high credit usage, or civil judgments against you, your credit can sustain damage. Credit repair attempts to rectify those problems by negotiating with creditors, bringing accounts current, and refinancing.
Should You Use a Credit Builder Program?
If you need to build your business credit, should you do it on your own or use a credit builder program? The answer depends a lot on the size of your business and how complicated your finances are. If you have just one or two small accounts, you could potentially tackle building credit on your own with a little research. However, a service could be valuable if you’re managing several types of debts or you’re trying to hit a specific goal.
Credit builder programs, as the name implies, offer services that help your business build credit. They can help you set up a business profile with the credit agencies, monitor your credit reports, connect you with vehicle financing, service credit, fleet credit, retail credit, vendor credit, coaching services, compliance reviews, and make sure the right accounts are associated with your business.
Business credit builder programs can be free or paid services. However, keep your eyes open for credit builder scams. You’re less likely to come across scams with the paid service options, but it pays to do your research before selecting one. Watch out for any that ask you to do something dishonest or illegal. Trust your gut. If something feels fishy, it probably is.
One reason many brokers and financial experts recommend financing, even when your business can afford to use cash, is that loans build credit. Several types of loans are easy to get and pay off, which positively impacts your business credit score. SBA loans can be a good option for businesses that can’t get a loan from their bank or credit union. Hard money loans let you use assets instead of credit to buy what you need. Bridge loans are designed to be replaced by long-term loans like commercial mortgages. In that case, the second loan pays off the first, which is reflected as a paid account on your credit. You can also refinance high-interest loans with lower-interest options to make paying debts easier.
Hopefully, this article has given you some guidance toward understanding your business credit score. However, it’s just a general overview of these topics. Every business is different, so it’s a good idea to get personalized advice based on your own business’s track record. To get your business credit score, analyze your report, and understand how it affects your borrowing power, get a good broker on your side. Brokers have an in-depth understanding of what goes into loan decisions and can steer your business in the right direction, saving you time and resources. Reach out to our team before you need a loan so that when it’s time to apply, you’re already in the right position. We look forward to getting to know you and learning more about your business and financing objectives.