Most of us are readily familiar with the general structure of consumer credit, but if you’re a small business owner, becoming familiar with business credit is important to your overall success. Establishing and maintaining business credit will help you build valuable relationships with vendors, suppliers, manufacturers, and financial institutions that are important to operation.
For business owners, a good business credit score translates into lower interest rates, better trade credit, and access to the financial support necessary to grow and maintain your business. (Get a peek at your business credit data with a free Nav account.) Still, the question remains: what is a good business credit score?
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Identifying a Good Business Credit Score
There are a few ways to look at that answer, but let’s deal with the “numbers” first. Unlike consumer credit, which largely revolves around a fairly standardized credit ranking system, business credit scores tend to vary based on the reporting company or bureau.
While scales may vary, many popular credit reporting companies, like Experian’s Intelliscore Plus and D&B’s PAYDEX Score, use scoring algorithms that rank scores from 1 to 100. Ranking systems like these typically associate a higher score with good business credit. For example, a D&B PAYDEX Score of 80 or higher would mean you make on time or early payments. (Check your D&B PAYDEX rating for free with a Nav account.)
Still, other companies like Equifax’s Small Business Credit risk Score for Financial Services, which uses a rating system that ranks scores from 101 to 992, ascribe to alternative rating scales.
The takeaway? To find out the exact scores needed for good business credit, it’s important to familiarize yourself with the reporting entities that valuable vendors, suppliers, manufacturers and lenders use.
Here’s what the business credit scoring system looks like for D&B and Experian.
Dun & Bradstreet PAYDEX
|Paydex Range:||Rating:||Paydex Risk Interpretation:|
|80 – 100||Good||A score of 100 means your payments come 30 days soon than your terms specify. 80 indicates on time payments.|
|50 – 79||Fair||A 70 indicates that you are paying 15 days late. A score of 50 indicates you are 30 days late.|
|0 – 49||Bad||40 or less means your payments are coming 60 days or more past the due date.|
Intelliscore Plus from Experian
|Score Range||Risk Class||Risk Description|
|76 – 100||1||Low|
|51 – 75||2||Low – Medium|
|26 – 50||3||Medium|
|11 – 25||4||High – Medium|
|1 – 10||5||High|
FICO SBSS scores range from 0 to 300. Like the other business credit indexes, the higher the score the better. If you are seeking financing, the magic FICO SBSS number to remember is 140. If you have a FICO SBSS score of 140 or above, you can pre-qualify for an SBA 7(a) loan. Most banks have a higher standard and will only prequalify you with a score of 160 or above.
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Achieving & Maintaining Good Credit
Similar to the way rating scales vary from company to company, evaluative methods can also vary depending on the firm or bureau that is reviewing your credit profile. Essentially, the impact of different types of activities (late payments, available credit, credit utilization, etc) can change from company to company. For that reason, it’s also important to research the logic that goes into a company’s credit score rating structure.
However, there is good news! While there may be different methods of evaluation, there are still some simple guidelines that can help you reap the benefits of good business credit.
- Pay On Time — or early — Every Time. Your credit score is used to evaluate the lending and credit risks associated with your company. With that in mind, it’s not surprising that one of the best things you can do to ensure a good credit score is to show that you can manage your debts and finances efficiently.Paying bills on time is a huge part of this, and therefore, it’s one thing you should strive to do on a regular basis. In fact, to achieve the maximum D&B PAYDEX Score, you will need to pay your bills 30 days ahead of schedule! Late payments and defaults can wreak havoc on your report and are a sure way to quickly turn good business credit bad.
- Utilize Credit. While it’s never good to have an overwhelming amount of debt, utilizing some of the credit allotted to you can actually benefit your overall credit score. Quite simply, if you can take out a loan and make regular, timely payments, the perceived risk associated with your company will decrease. Ultimately, responsibly engaging in credit utilization will help you earn or maintain a good credit score over time.The key to this approach is to make sure that you are never over-extended and that you are fully capable of making the necessary payments for the duration of your loan or trade agreement.
- Maintain Valuable Lines of Trade Credit. In terms of overall importance, trade credit is high ranking. Trade credit, or credit extended to your company by vendors and suppliers, is often the lifeline of a business. How you manage this essential financing tool will directly impact your credit. Building successful partnerships with these vendors and suppliers (and paying on time) will help you get the products, goods, and services you need while improving the likelihood of maintaining a good credit score.
- Maintain Your Personal Finances. Personal credit and business credit don’t always mingle, but in some cases, especially if you are a small business owner, your personal credit will be called into question. In fact, your FICO SBSS score will be heavily influenced by your personal credit — with pristine personal credit, you can close in on the 140 SBA pre-approval mark.This means it’s important that you maintain a good personal credit score if you’d like to keep or reach a good business credit score.
It’s easy to see a good credit score as a simple numerical range by which your company is judged. However, to really understand good business credit, it’s important to view the score as an amalgamation of short and long term practices that prove your company can handle and pay back debts. By regularly participating in the activities required to maintain good credit, you can open doors to essential financial opportunities.
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