A business credit score is a three-digit number between 0 and 100 that suggests the credibility of your business the same was as your personal credit score does when you borrow money for your own needs. Lenders take a look at your business credit rating when your business has a separate identity from you and you are taking out a loan in your company’s name.
|High risk||Medium risk||Low risk|
Payments are made 30 to 90 days past the due date or more.
You will highly likely be refused for a business loan.
Payments are made 15 to 30 days past the due date or more.
You are likely to get the nod but interest rates will be high.
Payments are made on or before the due date.
The chances for approval are very high and interest rates will be affordable.
A business credit score does not apply to individuals. A number of factors are taken into account to determine your business credit score such as:
- The strength of your business
- Outstanding amount
- The payment history
- Credit utilisation ratio
- Trading experience
How are business credit scores different from personal credit scores?
The main difference between a business credit score and a personal credit score is that the former is on a smaller scale. It ranges between 1 and 100, while the personal credit score goes up to 999. While a personal credit score can be checked only in specific circumstances by lenders, anyone can check your business credit scores.
Some of the factors to determine a business credit score can be similar to that of a personal credit score, but some factors differ, such as company size, industry risk and the like. You will need a social security number for a personal credit score, whereas you will obtain an employer identification number to get a business credit score.
Tips to do up your business credit score
Lenders would like to go through your business credit report if you need start-up business loans. However, it is quite complicated to get the nod when you need money for initial capital because, this time, your business credit score will be very low. Here is what you should do to improve your business credit score:
- First off, you should register your business as a corporation so that it can get a separate identity. If you are a sole proprietor, you do not need an EIN. In fact, your social security number will be treated as an EIN. Your personal credit score will decide if you can take out a loan.
- Try to borrow money in the name of your business so that you can build a business credit score. Get a business credit card. It will help meet your purpose. Do not max it out. Otherwise, this will ruin your business credit score.
In addition to the aforementioned points, you should use the following techniques to improve your business credit score:
- Pay your business bills on time
Your business credit is calculated after taking into account the payment history. If you have outstanding debts or you do not pay on time your business credit card bills, debts and to your suppliers, you will see a dip in your credit rating. Make sure that you pay off all your business bills on time.
- Use your business card but responsibly
A business credit card can come in handy to build your business credit rating. You should use this as much as possible but make sure the credit utilization ratio does not go beyond 30%. Pay off the balance on time. This will build your business credit score quickly.
- Separate your business credit from personal credit
Make sure that you do not mix through personal credit and business credit. You might be asked to give personal guarantee on your business loans when your business is a start-up and does not have a business credit score, but once you have established it, you should avoid doing so.
How is your business credit score calculated?
Your payment history is the most important factor that accounts for a larger proportion of your business credit score. Lenders would want to know whether you make all payments on time. Whether you borrow a smaller sum or a larger sum, you cannot flinch from paying payments on time.
Another factor is the age of your business. This will work to your advantage if you have been trading for a long time. Your credit score will be higher. Lenders trust companies more than start-ups if they have spent a few years trading. This shows that you have an acute sense of running a company, and the risk of closing down a business is very slow.
The amount of debt you owe will also determine your business credit score. It makes sense to have a small amount of debt. They will also check the usage of debt, the type of industry you are in and the size of your company.
Though business credit score is calculated based on multiple factors, it is yet to bear in mind that lenders use their own formula to check your affordability and credibility. While some lenders consider all these factors, others may consider only one factor, which is your payment history.
You can check your business credit score from various platforms free of cost. Experian and Equifax are well-known credit bureaus, but you can get your business credit score from other agencies like Dun and Bradstreet. Do not forget that you cannot get a free copy all the time. You will be required to pay fees.
Do you need a business credit score for small loans?
It depends on your business whether you need a small sum or large sum. Borrowing a large sum involves too much risk, so a lender would emphasise a business credit score. However, when you need a small sum, lenders will not give priority to your business credit score.
For instance, if you have a start-up and you need money for unforeseen business expenditure, they will likely lend you money based on your repaying capacity. You can simply apply for no credit check loans from direct lenders.
Lender need neither a personal credit score nor a business credit score to check to give approval to your application. They will simply make a decision based on your repaying capacity.
The final word
A business credit score is extremely important when your business has a separate identity. A lender would like to take a look at it when you need money for you business. Make sure you keep your business credit score in a good condition. When you are a self-employed, your personal credit score will be your business credit score.