Credit scores. They’re the be-all and end-all of the financial world. They’re widely recognized on a high-level, but often shrouded in mystery when you get down to the nitty gritty. They’re an essential part of our lives (consumer or business), and yet, while we know we should strive to achieve a good one, we’re often left to question what exactly is a bad credit score.
To complicate things more, most of us are hyperaware of the impact of good or bad credit scores as a consumer, but business credit may not be as widely understood. Bad business credit can seem like a dead end, but there is hope at the end of the tunnel. First, let’s get two important questions out of the way: where does my 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 to go through, 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.
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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.
So big deal, there are multiple business credit agencies, what does that matter to me? For starters, you should be aware that while your credit scores from each will be close, they won’t necessarily be identical. Furthermore, it’s always important to monitor your credit reports to make sure everything looks accurate. Knowing who to contact can help you clean up any errors, should you find them.
Defining What Your Personal Credit Score Means
Regardless of where your score is coming from, there are some standards used by lenders to determine your credit level and what it means. Because lenders will also take into account your personal credit, here is a quick look at where your personal credit score will land you.
|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 will 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 what factors have brought your credit score 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℠.
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 institutional lenders 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 your credit score, 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 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.
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