This post was reviewed and updated on August 18, 2020
At a high level, most people understand the importance of a good personal credit score and how it influences their ability to borrow. The same is true for small business owners. Many new business owners are unaware that they have a business credit profile which is basically a selection of credit scores that represent how you business meets its financial obligations. For most small business owners in the United States, your personal credit score and business credit profile will both be part of any business creditworthiness decision. With that in mind, it’s important to understand both your personal credit score and whats in your business credit history. In other words, what is a bad credit score?
Bad business credit can seem like a dead end, but you can positively impact your credit profile with a little bit of attention and a little effort. First, let’s talk about where does your business credit score come from, and what is a bad credit score?
Where Does Your Business Credit Score Come From?
Regardless of what lender you choose, they will request your credit information from one or more of the top credit reporting agencies. These agencies don’t actually define good or bad credit, that’s a universal standard used by lenders, they just spit out the score.
When it comes to reporting agencies, consumers may recognize names like Experian, Transunion and Equifax; while these companies do have business departments (think Experian’s Intelliscore PlusSM Credit Score), there are other companies that specialize in business credit as well. We won’t get into them here, but it’s worth taking note of the following names: Dun & Bradstreet® (D&B) , Credit.Net, and Accruint® Business. Found out How to Report to Business Credit Bureaus here.
You should also be aware that unlike your personal credit score, your business credit profile is public. In other words, anyone interested in accessing your business credit profile can request and see your business credit history and there is no requirement that you give a potential business creditor access.
Another difference from personal credit is how it is reported. While most personal credit scores are based upon the FICO score, business credit scores will vary depending on the reporting agencies—they won’t be identical. For example, although they will all look at the same data, they might weight it differently.
For example, Dun & Bradstreet is the only major reporting bureau that focuses exclusively on business credit and tends to focus on the trade credit relationships you have with vendors and suppliers. You’re probably familiar with the 100-point PAYDEX® score, but it’s only one of the scores D&B produces.
Equifax, another one of the major bureaus, is tied into the Small Business Finance Exchange (SFBE) which is made up of data collected by small business lenders in the U.S. Equifax takes that data and creates a report that reflects how small business owners make credit card and loan payments—meaning their credit reports will be weighted with that information.
Regardless of the business credit reporting agency, they all consider this same information in how they score your business credit, but the way they reflect that score could be different and won’t be reflected in a universal credit “score” that is consistent among the reporting agencies.
In addition to your credit history your business credit report will include a lot of information that is part of the public record and includes information about the type of business, the industry you’re in, where you’re located, and any other information available as part of that public record. As a result, regularly monitoring your credit profile becomes really important to make sure the information reported about your business is accurate and up to date.
Fortunately, the credit bureaus are motivated to ensure the information they have about your business is accurate, so any verifiable errors you find in your credit report can be corrected.
Defining What Your Personal Credit Score Means
Your personal credit score will be very similar from reporting bureau to bureau and is based on the FICO score. Your score correlates with a rating and a profile of your personal credit practices.
Because small business lenders will also take into account your personal credit score, here is a quick guide to what a lender sees when they look at your personal credit score.
|800+||Excellent||Long credit history with no late payments or accounts that were ever in collections. This rating will receive the lowest rates with the best lenders.|
|750 – 800||Very Good||Likely to have a shorter credit history, but is still devoid of late payments or accounts that were ever in collections. This rating typically qualifies for low interest rates with the best lenders.|
|700 – 750||Good||There are no recent late payments or accounts in collections. Typically, you should be able to qualify for a good lender, but at a slightly higher rate.|
|650 – 700||Fair||There are some recent lay payments or accounts in collections, but everything is currently in good standings. This rating might exclude you from bank loans, but you will typically qualify for a decent rate from most alternative lenders.|
|600 – 650||Bad||There are late payments and the account owner is struggling with accounts in collections. Historically, the same is true. Some lenders may approve this rating for loans, but they will be at higher interest rates.|
|Below 600||Very Bad||The account owner is in the middle of collections and has frequently had trouble in the past. You may be able to get a Merchant Cash Advance or Cash Flow Loan, but the rates will be high.|
If your score is below 650 (“bad credit score” and “very bad credit score”), you’ll want to be very careful in how you proceed. Depending on why your credit score is below 650, a missed payment or an account in collections can put you in a dangerous place.
Defining What Your Business Credit Score Means
Let’s discuss what a bad business credit score might look like according to the 3 major business credit bureaus: Dun & Bradstreet® (D&B) PAYDEX, Experian’s Intelliscore Plus℠ Credit Report, and the FICO® LiquidCredit® Small Business Scoring Service℠. As mentioned above, your business credit profile will include a collection of scores in addition to these, but they will give you an idea of how a small business lender looks at, and evaluates, your business credit.
Dun & Bradstreet PAYDEX
- 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
- 76 – 100 (Excellent): Lowest Risk
- 51 – 75 (Good): Low – Medium Risk
- 26 – 50 (Fair): Medium Risk
- 11 – 25 (Bad): High – Medium Risk
- 1 – 10 (Very Bad): Highest Risk
FICO SBSS Score
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. If your score is below 140, you have some work to do before an SBA lender will consider offering you financing.
Factors that Can Contribute to Bad Business Credit Scores
Although your score is telling, it’s not always a full picture of why you have a bad business credit. Each credit profile is different, and though late payments and collections status do have a significant role in determining how your credit is scored, specifically a bad credit score, there are other factors that can attribute to a score that’s lower than desired.
- Bad Personal Credit: If you’re just starting or if you’re business is fairly new, there hasn’t been much time to build a business credit history. For that reason, most new business owners seeking a loan will have their personal credit history called into question. If your personal credit history and score reflects the defining characteristics of bad or very bad credit, then your business credit will also reflect that.
- Little to No History: As mentioned above, if you are a prospective or newer business owner, your business won’t have a robust (or any) credit history. This won’t automatically land you in dangerous waters, but it will prevent you from obtaining excellent credit scores. The best way to deal with this is simply making on time or early payments — if your business account is plagued by late payments or an account in collections, it can be enough to land you in the bad business credit range.
- Company Profile: Your company structure, size, and industry can play a role in your business credit score. Certain industries are inherently riskier than others (i.e. a restaurant business), and small companies are deemed riskier than those with more than just a few employees. Again, the best remedy for this is making on time or early payments to prove that your business is trustworthy.
- High Credit Utilization: When factored in with other credit items on your credit report, your available credit can also factor into where you land on the credit score rating system. If you’re utilizing a large portion of your available credit and seeking to secure more funds, and if you’re also struggling to meet payment deadlines, you may be deemed a high risk to prospective lenders.
How a Poor Credit Score Can Affect You
Although a good personal credit score or business credit profile will not guarantee you a small business loan, it will provide options a bad credit history won’t. A poor credit score doesn’t necessarily mean you won’t be able to get approved for financing, but it will likely mean the interest rates will be higher, the terms will be less favorable, and your payments will be more frequent. This isn’t always the case, but if you have a poor personal and business credit history, you will likely not qualify for the lowest interest rates or the best loan terms.
How to improve a bad credit score
Fortunately, you can build a strong credit profile or strengthen a weak one. Be aware, there is no shortcut—slow and steady wins this race, but you just might be surprised at how much and how quickly you can positively impact both your personal and business credit profiles if you think in terms of months and not days. Additionally, I would suggest you not trust anyone who claims they can repair a bad credit history overnight. There is no gimmick that the credit bureaus haven’t seen before. For example, shifting credit accounts around is pretty transparent and might actually hurt your credit repair efforts.
With that in mind, here are four things you can start doing today to improve you credit:
- Monitor your credit: It’s human nature that we tend to positively impact the things we pay the most attention to. I’ve had a personal relationship with Experian for many years and review my personal credit score every month (which is not too frequent, by the way). All the major bureaus offer similar services for both personal and business credit for a small fee. At Nav, you can monitor both your personal and business credit for free. This is the first place to start.
- Separate your business credit use from your personal credit use: You’ve likely heard this before. It’s not uncommon for business owners to use personal credit to pay for business expenses. This is particularly true for young businesses that haven’t established a strong business credit profile yet. Although there may be times when it’s expedient and I have to admit, I’ve done it myself or two when I was a small business owner, but it’s a mistake. It won’t help you build your business credit and could possibly even hurt your personal score running up business expenses on your personal card—even if you pay the balances off every month. The converse is also true. Co-mingling your business and personal finances by paying for personal expenses with business credit isn’t a good idea either. Keep your business and personal credit and finances separate.
- Look for ways to establish business credit accounts: Probably the most underrated business credit is trade credit with your vendors and suppliers. While 30- or 60-day payment terms might not be a small business loan, it will help your business demonstrate a good credit history that lenders want to see before they approve your loan application. What’s more, if you have a difficult month and need someone to cut you a little extra slack, your vendors are more likely to help you out because they want to continue doing business with you (just make sure you’re late payment isn’t automatically reported to the credit bureaus). You might also want to consider a business credit card. Business credit cards typically are easier to qualify for than a small business loan and if you make your periodic payments on time, it will help you build a strong business credit profile.
- Use the credit you need and make timely payments: The single biggest thing you can do to build or improve you credit profile is to make each and every periodic payment on time. This applies to both your personal and business credit. A series of late payments will pull your credit down much quicker than months of good credit practices will build it.
Building and maintaining a strong credit profile is a marathon, not a sprint. A strong profile will provide options unavailable to a business with a weak profile and will move your loan application to the top of the pile when you’re looking for the best business loans to meet your business needs.
We often talk about what a good credit profile looks like, but it’s important to know what a bad credit profile looks like so you can focus on improvement if that describes you or your business.