A business credit score measures the overall creditworthiness of a business, much like a personal credit score measures the overall creditworthiness of an individual. While the concept behind each credit score is similar, there are significant differences every business owner should understand.
This guide will introduce you to the business credit score, what it is used for and how you can improve your business's credit score.
What is a business credit score?
Your business credit score, while distinct from your personal credit score, is similar in concept. Basically, a business credit score is used to demonstrate how financially sound and reliable a business is likely to be in making its owed payments on time.
"Businesses have credit scores similar to personal credit scores," said Bumbales. "A business credit score is a numerical measure between 0 and 100 that represents how responsible and creditworthy a business is."
Business credit scores are determined by three major credit bureaus: Dun & Bradstreet, Equifax and Experian, said Bumbales. The scores determine creditworthiness for a number of things, including business loans, credit cards and payment terms. Strong business credit and a responsible payment history can also reduce the cost of borrowing money.
"Each credit bureau will collect data and information about a company's financial history and attach a score, but each bureau has a different set of criteria they value when attaching a score," added Bumbales.
What are business credit scores used for?
Much like personal credit scores are used to determine an individual's borrowing eligibility, business credit scores are primarily useful when a company needs financing. A lender relies on a business credit score to help determine whether to extend funding to a business.
"A business's credit score is usually most important when trying to secure financing," said Jeffrey Bumbales, director of strategic partnerships and marketing at online lender Credibly. "The better a business's credit score, the more lucrative options it will have when applying for a loan or other financing products."
Business credit scores can influence multiple things about the financing a company can obtain, including the value of funding, repayment terms and interest rates, said Luke Voiles, vice president and business leader of QuickBooks Capital at Intuit.
"The scores are used to determine whether or not to offer the business credit, how much to lend and what terms to use," he said. "They can also be used by other companies you may do business with to decide whether to extend more generous payment terms."
If you're considering financing a purchase or borrowing money, it's important to understand your current business credit score and how any new funding might impact it in the future.
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How is a business credit score different from a personal credit score?
While the concept behind business credit scores and a personal credit score is similar, they are distinct. Business credit scores do not impact one's personal FICO score, for one. They are also publicly available, unlike private personal credit scores.
"Business and personal credit differ in a few main ways," Bumbales said. "Personal credit scores are directly attached to a person's Social Security number, whereas a business credit score is attached to a company's employee identification number."
Business credit scores are also determined by a different (though sometimes overlapping) set of criteria than personal credit scores, said Voiles.
"Personal credit scores are determined through FICO's algorithms based on your personal credit history," said Voiles. "Business credit scores, however, are typically determined by looking at payment history, amounts owed, length of credit history, credit mix and new credit.
"On the business score side, there is not the same consistency you get with FICO," Voiles added. "There are many providers of business scores that are measured and scaled differently, so it can be confusing for small businesses to understand their scores."
According to Mike Ross, president of commercial collection agency Miller, Ross & Goldman, a business credit score often reflects whether a business pays its vendors and creditors early, on time or late.
"A perfect score of 100 indicates that the subject company typically pays 30 days before agreed terms or invoice payment due dates. A 90 indicates 20 days before and an 80 indicates payment on time," Ross said. "Scores below 80 are then progressively reflective of the number of days a company typically pays beyond agreed invoice terms. For example, a 70 is indicative of an average 15 days beyond agreed terms …"
"There are other relevant factors and scoring models on how business credit is calculated, including industry risk, average debt load, years in business and company size," he added.
Business credit score factors
While each credit rating agency has its own methods of calculating a business credit score, there are a few common factors in a business credit score:
- Industry risk. Even if your business is financially sound and has a strong business plan, a risky industry could reduce your business credit score. For example, businesses in the legal cannabis industry face legal challenges many other businesses do not; that can be a drag on otherwise financially stable cannabis businesses' credit scores.
- Company size. The size of a business in terms of revenue matters significantly to a business's credit score. Company size is used to determine important information like debt-to-income ratio and cash flow, which influences a business's ability to pay its bills on time and meet its debt service obligations.
- Payment history. Meeting all your payments in full and on time keeps your business credit score healthy. Avoiding any collections referrals or liens is critical, as those remain on your credit history for up to seven years.
- Age of credit history. Just like a personal credit score, a business credit score is influenced by your business's credit history. A positive track record over a long period of time influences your credit score for the better, and a business that has been operational for several years is better positioned than a brand new company.
- Credit utilization. Another major factor is how many lines of credit or loans you have on your books. Businesses with high debt usage are likely to see a negative impact on their credit score. This is especially true if many new lines of credit were opened within the past year.
How can I get my business credit score?
To obtain your business credit score, you have to request information from the three major credit bureaus. To do so, you will need to visit their respective websites and request a credit report.
- Dun & Bradstreet: To find a company's credit report, visit the Dun & Bradstreet website and search for a company by name. Dun & Bradstreet offers multiple types of business credit reports, all of which include a business credit score, starting at $61.99.
- Equifax: To purchase a business credit report through Equifax, visit the credit bureau's website. There are a wide range of credit reports and products for monitoring business credit scores available, starting at $99.95.
- Experian: To find your business credit score or another business's credit score, visit the Experian website and click "Get your report now or check another business now." Experian offers multiple options for retrieving a business credit score, starting at $39 for a basic report.
How can I improve my business credit score?
If your business credit score isn't as good as you were hoping, don't worry; there are several steps you can take to improve your business credit. These include:
- Monitoring your business credit score regularly. "Simply keeping an eye on business credit scores is an impactful first step in improving it. Many business owners are unaware they exist, unsure of how to access them, or don't check them regularly or take them into account when managing their business," said Voiles.
- Keeping your business and personal finances separate. "Business owners should strive to keep their business finances and personal finances separate. Headaches such as personal debt-to-income ratio, lack of business credit, and more can arise if a business owner does not keep their personal finances and business finances separate," Bumbales said.
- Making payments on time. "Beyond careful monitoring, making on-time payments to creditors is one of the best things a business owner can do to improve their business credit score," said Bumbales.
- Reducing overall debt-to-income ratio. "Improving your business credit score can be done similarly to improving your personal credit score, by being a responsible borrower. Pay your obligations on time and avoid creating too much debt compared to your revenue. If you have had any past strikes on your credit, make sure to resolve them as soon as possible," Bumbales said.
Even with a healthy business credit score, a lender might require a business owner to personally guarantee a loan. This typically includes a personal credit check, Ross said, and is especially common when the business is a sole proprietorship or has only recently launched. [Read related article: How to Apply (and Get Approved) for a Business Loan]
While a business credit score and a personal credit score are distinct, it is a best practice to maintain a good score for both as they can sometimes complement one another. Business credit reports can be just as important in securing business financing as a strong personal credit score and guarantee. Maintaining good business credit reduces the cost of borrowing money and avails your business to more favorable payment terms with creditors and vendors alike.
"While one doesn't necessarily impact the other, with some exception, the benefits of habitual early and on-time payment practices on both fronts will have broad and positively impactful benefits over the course of time, for both the business and the individual," Ross said.
Business credit score FAQs
How often should you check your business credit score?
There is no universal answer. As each business operates uniquely, the frequency of lending and borrowing compared to incoming revenue can be dramatically different across industries and businesses. A starting rule of thumb is to check at least once each quarter. Many businesses might prefer to check monthly. More often than that is likely unnecessary.
What is a "good" business credit score?
Business credit scores don't look like personal credit scores. A perfect business score is 100. By most standards, anything above 80 is in the good range and will get you favorable interest rates. An 80 means you pay on time but there are some imperfections in your credit history. From 50-79, you are in the "good" range: You pay all of your bills, but some are late. Dropping below 50 will set off red flags and impact your ability to borrow money.
Does closing a business credit card affect your credit score?
Yes. This is more the case for small businesses than large ones, but credit history is rolled into the calculations, and canceling cards can negatively impact your credit history.
How can you get a free business credit report and score?
Plenty of companies offer free credit reports. It's often best to go to the source. Nav and Experian both offer free reports, but there are limits on how many free reports you can get in a year.