When applying for a business loan or business credit card, you should first know your business credit score. For personal applications, it’s pretty simple to get this a number of ways. For your business score, the methods are a bit different, but they still result in a number that will help you gauge your creditworthiness. For anyone looking to get the best rate on a business credit card or loan, knowing your “magic number” before you apply can be helpful and save you a lot of money.
So, what does your score mean? How can you know if it’s a good or bad score? Read on for details to help you classify your score before you take the plunge.
Bad Scores Explained
While personal credit scores have some strict rules for what makes one good or bad, business credit scores are quite nuanced. You won’t find there to be the same hard line that designates scores at a specific number to be adequate for a loan. Gerri Detweiler, Education Director at Nav, shares the truth about why this happens. “Business credit scores run on a different scale than consumer credit scores. So, it’s not always clear what is a good business credit score and what isn’t.”
Even the experts are reluctant to give a clear numeric value on what passes and what doesn’t. That doesn’t mean you have to go into an application blindly, however. Detweiler has some sage advice for anyone wanting to examine their business score before risking a hard inquiry on their credit. “My best recommendation is that you check the scale of the scoring system and see where you fall. If you’re in the top 20 to 30% of the scale, it’s probably a good score.”
Specific Scoring Models Matter
There’s another consideration that comes into play when dealing with business credit score: who is doing the scoring. Different agencies have different number scales – just like what we are used to seeing with personal credit scoring. The two major scoring models, FICO and VantageScore, each have their own definitions of what makes a personal creditworthy. Business scoring agencies are no different. Detweiler gives us a hint as to what they are looking for, however: “With the D&B Paydex score or the Experian Intelliscore, a score above 80 is very good. With a FICO SBSS score, you should be fine if your score is 160 or above.”
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Options for Low Scores
The numbers referenced above are good targets to hit for the vast majority of business loans and credit cards. Just as personal credit companies have some options for less favorable borrowers, business lenders do, too. The practice of giving out loans or credit to those who are high risk is called “subprime” lending, and it was a notable trend in the past few decades with regards to mortgages. Subprime is back, however, with many lenders looking to expand the business by offering credit cards and small business loans to companies with lower-than-average business credit scores – usually at a much higher interest rate. Subprime lending ensures that you don’t have to have a perfect score to get access to cash, but you should be prepared to pay for it.
Another option is to look for secured lending opportunities. Secured business credit cards do exist. While they require you to put some cash on the card to ensure you pay it back, they are an excellent way to raise your score and establish yourself as a good credit risk.
Traditional collateral can get you approved, as well. Securing your business loan with a home or the equipment you buy with the loan proceeds gives the bank a chance to get their money back, should you default. It can help bridge the gap between a hard “no” on your credit application and getting a modest loan at higher rates with a decent amount of collateral.
Raising Your Score is Preferred
While many options exist for small businesses with bad credit to get funds, the absolute best outcome for your company (especially in the long-term) is to raise your score and get approved for the most competitive lending offers. How can you bring up a sluggish business credit score? Start with these:
Ask vendors to report to credit
The companies you purchase goods and services from are not required to report your good payments to business credit agencies, such as Dun and Bradstreet. They may, however, especially if you ask. If you have the choice to work between two similar vendors, choose the one that’s willing to help report your creditworthiness to the agencies.
Open at least one small business credit account.
If you’ve never opened an account in your business name, start now. It doesn’t have to have amazing terms, just be available. Use it, pay it off, and keep it open. Your score will reflect your good behavior over time.
Keep your credit usage low.
Don’t use more than 20 – 30 percent of your available credit across all cards, and try not to have too much sitting on one card at a time. Balance transfers can be especially harmful to your debt ratio, as they put all of your debt onto one card, putting that card over the healthy ratio.
Check your business credit report often.
Don’t take anything for granted. Always check to see that payments are being reported and that your history is building over time. Review your business credit report to look for discrepancies that can drop your score and follow-up on any reporting errors you find promptly.
Never close accounts.
If you find that a credit card or open line of credit no longer works for you, just stop using it. Closing accounts will drop your score, so do what you can to keep it open. Some cards merely need a call from you once a year to let them know your intent to keep the line open; others require a charge once in a while. Do what you need to keep your credit accounts available, even if they aren’t your favorite. More open, paid-off accounts can help boost that score!
While having a low score is frustrating, many small businesses have no business credit score at all—which can be just as bad. If you haven’t done anything to establish a business credit footprint, don’t delay. Now’s the time to start creating the perfect score to access the best cards and loans available for your growing company.
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This article was originally written on December 17, 2018 and updated on December 10, 2020.
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