The Role of Credit Scores in Securing Business Financing: What You Need to Know

The Role of Credit Scores in Securing Business Financing: What You Need to Know

The Role of Credit Scores in Securing Business Financing: What You Need to Know

Key points:

  • Strong credit scores can unlock financing opportunities for small businesses. 
  • Credit, in turn, can help businesses manage cash flow and grow. 
  • Learn how to build good credit, and leverage it successfully. 

What Is the Purpose of Credit?

Credit allows a person or business to make purchases they could not afford to pay for in cash. It also allows the borrower to maintain a cash cushion instead of using all their available cash to buy equipment, real estate, or make other major purchases. 

Credit can offer flexibility. For a business, credit can help it grow. 

Why Is Credit Important to a Business?

When credit isn’t available to businesses, they may find it difficult to grow or even survive. Fluctuations in revenue—even seasonal changes in sales or slow-paying clients—can create a downward spiral. 

What is business credit? That term describes a credit report for a business. Similar to personal credit, it is used by lenders, insurance companies and other businesses to help evaluate credit risk. 

Why Are Business Credit Scores Important?

Lenders may use business credit scores to help decide whether to offer small business financing or loans, and how much to charge. 

Suppliers often check business credit before extending net-30 credit terms. Business credit scores can make it easier to make a decision about whether to extend payment terms, and how long those payment terms can be. 

How Does Credit Affect Business Owners Financing Options?

Creditworthiness is important to many lenders. It allows lenders to make better decisions and reduce risk.

Good business credit may help you qualify for small business financing at better terms. They may also help a small business owner avoid risky guarantees. 

On the flip side, poor credit or no credit may make a lender hesitate to extend credit. 

Do Credit Scores Affect Business Loan Eligibility?

Some lenders check business credit scores and/or reports, some check personal credit, and some check both—or neither. 

Credit scores are a shortcut lenders may use to help gauge risk. Credit scores are created by analyzing data from a large number of credit reports. Lenders can use that information to help them reduce their risk. 

How Far Back Does Credit History Go in a Credit Report?

There’s no time limit on how long information can be reported on business credit reports. Each credit reporting agency may have its own policy for how long it will report information on business credit reports. 

On personal credit reports, they can be reported indefinitely, but negative information like late payments, collection accounts and charge-offs can only be reported for seven years. (Bankruptcy can be reported for up to ten years on personal credit reports.) 

Does a Business Loan Affect Your Personal Credit Score?

Most business loans don’t affect personal credit scores. It’s unusual for lenders to report business loans to the owner’s personal credit. However, there are some exceptions. 

  1. Some lenders will check personal credit scores when considering applications for personal credit or financing. This will create an inquiry on the personal credit report that was checked. Credit inquiries lower lower credit scores but usually just by a few points. 
  2. Business loans may carry a personal guarantee. If a loan requires a PG, and the business owner doesn’t pay it back, the lender may report the default to the owner’s personal credit reports. Or if the account is turned over to a collection agency, the collection account may appear on the owner’s personal credit history. 
  3. Business credit cards generally don’t report to personal credit, but they may. This article explains which credit cards report to personal credit. 

How Can a High Credit Score Benefit a Business When Applying for Financing?

A business owner often feels unsure when applying for credit. The lender has money the business needs, and the entrepreneur can feel like they are at a disadvantage. 

A strong credit profile gives your business more leverage with lenders. You can use your high credit score to help negotiate better rates, terms, and conditions.

Here’s how a strong credit score can benefit your business:

1. Access to Better Loan Terms

Lenders view a high credit score as an indication of a low-risk borrower. While credit isn’t the only factor lenders consider, it can help a business owner get credit on more favorable terms. These can include:

  • Lower interest rates: A high credit score may help you qualify for loans with lower interest rates, which makes it less expensive to borrow over time.
  • Higher credit limits: Businesses with strong credit may also qualify for higher credit lines; more available credit offers the ability to tap funds when you need them for growth and operations.
  • More stable financing. Loans from banks and credit unions, including SBA loans, often require good credit, including personal and/or business credit. 

Impact: Lower interest rates and higher credit limits can save your business money over time. 

2. Easier Approval for Financing

For some lenders, a strong credit score increases the likelihood your loan application will be approved. Again, it’s one of several factors lenders may consider, including revenue, time in business and industry. Yet, it can help as businesses with good credit scores have demonstrated the ability to pay on time. 

Impact: Easier approval means you can secure the funds your business needs more quickly, allowing you to seize business opportunities without delays.

3. Favorable Repayment Terms

Businesses with high credit scores can often negotiate better repayment terms, including longer repayment periods and/or more flexible payment schedules. This can help make managing cash flow easier and reduce financial stress.

Impact: Favorable repayment terms can improve your business’s cash flow management and give your business the ability to weather difficult periods. 

4. Access to a Variety of Financing Options

Again, not all lenders require credit scores. But many do. Good credit scores may open up additional financing options including traditional bank loans, lines of credit, and alternative financing solutions like equipment financing or online loans. 

(Note that if you are wondering how to get a business credit card, business credit is less likely to play a factor. Most small business credit card issuers check personal credit, making these an excellent option for business owners with good personal credit.) 

Impact: There are many different types of small business financing, and having access to a variety of options allow you to choose the best solution for your business’s specific needs, whether it’s for expanding to a new location, purchasing inventory, or managing cash flow.

What Credit Score Is Needed for a Small Business Loan?

Personal credit scores, including VantageScore credit scores and most FICO scores, range from 300—850 with higher scores representing lower risk. With personal credit, some lenders require higher credit scores, while some are more lenient. Generally, though, credit scores of 650—680 or less can make it more challenging to get credit. 

Business credit score ranges depend on the credit scoring model used, and there is a variety. Here are a few examples:

Business Credit Scoring ModelScore range
Equifax Business Delinquency Risk Score224 – 580
Intelliscore℠ Plus from Experian0 – 100
FICO® LiquidCredit® Small Business Scoring Service℠0 – 300
Dun and Bradstreet PAYDEX® Score0 – 100

Each lender has its choice of which credit scoring model to use. And then it has its choice of what credit scores are acceptable. 

What is a good business credit score, then, depends on the lender and the level of risk they find acceptable. But the stronger your credit, the more likely your credit scores will help your application for a small business loan, rather than hurt it.

How Can I Improve My Business Credit Score To Secure Better Financing Terms?

The main factors that tend to affect business credit scores are:

  • Payment history
  • Age of credit history
  • Debt / debt usage
  • Industry risk
  • Company size

Here are steps your business can take to improve its business credit: 

Establish Credit

Many small business owners might not prioritize establishing business credit at the start, especially if they can rely on personal credit or resources to get the money they need to start their business. But building a separate business credit profile becomes increasingly important. 

To establish business credit, make sure you have at least a few tradelines that report to business credit. These can include net-30 accounts, business credit cards, and lines of credit. These accounts help you build a positive credit history.

Pay On Time

On-time payments are one of the most important factors in business credit scoring models. Pay on time to help ensure a good credit history. But paying early may help build stronger credit with certain scoring models. Either way, avoid paying late. It can hurt your credit scores. 

Keep Debt Low

Debt isn’t necessarily bad; it can be essential to helping your business grow. But managing your debt well will help your business avoid getting too deeply in debt. Try to keep your credit utilization ratio below 30% when possible. 

Check for Mistakes

Errors on business credit reports are not uncommon. Regularly monitoring your credit reports can help you spot and correct these errors so you can take action. 

How Nav Can Help

If you’re ready to see your credit data and start building better business credit, Nav can help. 

You can check personal and business credit for free (no credit card required).

With Nav Prime™, you’ll get both personal and business credit scores* and Detailed Credit Reports from two leading business credit reporting agencies: Equifax® and Experian™, along with business credit scores Equifax® Business Delinquency Score® and  Experian™ Intelliscore PlusSM V2. 

Personal credit is also important to lenders, and with Nav Prime you’ll get personal credit scores and detailed reports from  Experian™ and TransUnion®. Scores provided are the TransUnion® VantageScore® 3.0, and Experian™ VantageScore® 3.0. 

Understand what lenders are reporting about your business, and view both business and personal credit in one dashboard.  

In the Credit Health hub, you’ll see aggregate trends in your credit, key factors having the most impact on your scores, and insights into new progress you’ve made. 

You’ll also see details on public records, including UCC filings, that can directly and indirectly impact financing or other opportunities. 

*Nav provides access to Experian™ Intelliscore PlusSM V2, Equifax® Business Delinquency Score®, TransUnion®VantageScore® 3.0, and Experian™ VantageScore® 3.0. VantageScore is a registered trademark of VantageScore, LLC.

This article was originally written on May 28, 2024.

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