Small business owners have a lot of numbers to think about when managing their finances. But one series of numbers that often gets ignored is their business credit scores. Just as individuals earn a numerical rating to help lenders determine their credit-worthiness, businesses are also given a score based on their credit history, and that score can impact their ability to get financing, government contracts, trade credit accounts and more.
Business credit scores are created by agencies like Dun & Bradstreet, Experian and Equifax, all of which use a score that ranks a business from 0 to 100, with 100 as a perfect score. You should aim to keep your business credit scores above 75.
In addition to these bureaus, FICO also has a score that rates small businesses: the FICO SBSS score. It ranges from 0 to 300, the higher the score, the better. The SBA uses FICO’s SBSS model to pre-screen it’s most popular loan applications. If your score falls below 140 then you likely won’t qualify for these attractive (loan interest rate) loans. And banks usually require your FICO SBSS score be even higher, in the 160 range.
With all the different bureaus and types of scores, it can be confusing. The good news is that following a few simple steps can ensure your business has a strong credit profile regardless of the bureau or model being used to judge it.
Many small business owners might not see a need to establish business credit when they are starting out. Often, when working on a small scale, you can bankroll the company on your personal credit. But even if you don’t see an immediate need for business credit, one might arise down the road as the business grows and expands. It’s better to dig your well before you’re thirsty, right? Not establishing a business credit profile might disqualify you from financing when it’s needed.
Since business credit scores are strongly based on history, you should open a few credit accounts, like business credit cards, to start to build a credit history. Even if the business does not need this financing, it will pay off to use it minimally and show your business is responsible managing credit.
You might think that paying all of your bills on time is enough to earn you perfect business credit reports. With your personal credit score, this might be true. But with your business credit score, on time is not enough. The Dun & Bradstreet Paydex score, for example, is completely based on the timeliness of your business’ payments to its vendors, suppliers and creditors. Paying on time will earn you a Paydex score of 80. The only way to earn a perfect 100 is to make your payments 30 days before they are due.
Keep Debt Low
A big factor impacting your business credit score is your debt-to-equity ratio. This measures your business’ financial leverage in relation to the amount it is currently using. Credit utilization is another important metric, which looks at your available credit in relation to your debt. A high ratio will result in a low credit score. Small business owners should aim to keep credit utilization below 30 percent. A good tip to help manage this is to make several small payments during a billing period rather than waiting until the end to pay off the debt in full.
Check for Mistakes
Mistakes are more common on business credit reports than on personal reports. A Wall Street Journal survey showed that 25 percent of people who checked found business credit report errors that lowered their score. The main reason errors are more common is because business credit data is much more fragmented, so it’s easier for information to get crossed up.
This is another reason why it’s important for you to regularly monitor your reports to ensure there are no mistakes.
Nav offers truly free business credit reports and monitoring on our website. We also have a free tool (CreditSweeper) that helps you spot and dispute any mistakes.
By doing these simple things, you should be able to maintain a healthy business credit score and ensure your business is poised to take advantage of any growth opportunity.
This article was originally written on April 24, 2015 and updated on February 1, 2021.