Business Credit Scores Explained
If you are a small business owner, you’ve probably considered ways to get funding to grow your business. Even if you were able to start your business with your own savings, the time will come when you may need to access additional funds. It will be incredibly helpful to you to understand the bigger picture when it comes to business credit. Understanding how small business funding works, how business credit scores are calculated, how business credit scores differ from personal credit scores, and the importance of establishing good credit, will all help you achieve success as you expand your business.
In this guide, we’ll address all of these common questions. We’ll also discuss why they are important to every business, whether you are currently looking for additional capital or not. After all, it’s important to establish good credit before you apply for funding. We’ll also discuss how conventional small business financing companies use your credit score information.
Index to this Guide:
- Understanding Business Credit Scores
- Understanding Business Credit Reporting
- Improving Your Credit Scores
- How Fundbox Views Credit Scores
Understanding Business Credit Scores
Before we dive into the details about business credit scores, how they are used, and how to keep track of them, it’s important to understand why they are so important, and why this is such a difficult topic for so many. Even highly educated business owners find business credit difficult to understand. There are a lot of reasons that make it complicated...and very important.
Establishing good credit scores is important because:
- Suppliers often look at your business credit score before offering terms, and having good credit makes it easier to negotiate favorable terms with them
- Banks rely heavily on business credit scores and FICO scores for establishing lines of credit
- In the absence of a business credit score, you need a very strong personal credit history to qualify for a small business loan based on your personal credit alone
Dealing with credit scores can be challenging because:
- It often takes at least a year or two to establish or improve your business credit history or personal credit history
- You can influence and improve your credit scores with effort, but you cannot directly change them since they are given to you by external rating agencies
- Internal record keeping and monitoring small business credit scores can be time consuming
What is a Business Credit Score?
Now that we see how important business credit scores are, let’s define them: A business credit score is a number, representing the likelihood your business will be approved for funding.
This is similar to, but not the same as, a personal credit score or personal FICO score. Most people are familiar with the concept of personal credit scores. There are a few key differences between these and business credit scores. For personal credit scores, the ratings range from 300 to 850, with most lenders requiring a minimum score of at least 600 for a personal loan.
Business credit scores range from zero to 100 and most small business lending companies require a minimum business credit score of 75. The Small Business Administration (SBA), banks, suppliers and other business lenders rely heavily on business credit scores and FICO scores when providing lines of credit or extended payment terms.
How is a Business Credit Score Different from Personal Credit Score?
A business credit score differs from a personal FICO or credit score in the following ways:
- Rating Agencies: Consumer lenders use TransUnion, Equifax, and Experian while business financing companies rely on Dun & Bradstreet, Experian, Equifax, and even their own proprietary formulas
- Range: Personal credit scores range from 300 to 850. Business credit scores are from 0 to 100
- Standardization: FICO or VantageScore are used by the majority of consumer credit bureaus. Business lenders, on the other hand, tend to develop their own standards or use rating agencies like Dun & Bradstreet to make their lending decisions. Nearly every small business financing lender uses a different formula
- Access: You can see your personal credit score for free from multiple sources, but there are a limited number of sources available for viewing your business credit score. The three major business credit bureaus (Dun & Bradstreet, Experian, and Equifax) will all provide you with your score for a fee.
- Data: While most small business financing companies only consider your business credit score or FICO score, some will look at both
Many small business owners try to avoid mixing personal and business credit cards and lending strategies. This makes sense, because a poor business credit score may negatively affect your personal credit score, while a poor personal credit score may work against you when applying for small business financing. Unfortunately, it can be very difficult to keep personal and business finances from getting tangled, since so many business financing options still require you to provide a personal FICO score.
Using Business Credit Scores
Although most start-up businesses must rely on personal credit for initial financing and use personal assets like homes for collateral, it is a good idea to establish a business credit score as quickly as possible to limit personal exposure. Create a “business credit profile” by separating your business credit from your personal credit.
Use only business credit cards for business expenses and do not mix personal and business credit cards. Keep your financial records, tax information and insurance coverages separate and you may even want to consider using separate banks.
If your business is just getting off the ground, you’re probably lending money to your business from your personal finances and recording it as "loans from officers." Once you have been in business for a while you will want to establish separate credit for your business. This can limit your personal liability and improve your ability to secure a business loan.
What Factors Affect a Business Credit Score?
- Longevity – How long have you been in business? If you’ve been in business for several months or years, that will contribute to raising your score.
- Revenues – What are your annual revenues? If your business is bringing in revenue, that may have a positive impact on your score.
- Assets – What assets does the business own? If you have some assets, such as property, this is likely to raise your credit score.
- Outstanding debts - What loans and credit cards do you currently have? If you are using credit responsibly and paying it off on time, this will have a positive impact on your credit score, and make it more likely that you can get approved for a loan if you apply for one.
- Personal and business loan history and credit history – How long have you had both personal and business credit? What loans have you had in the past, what were the value of those loans and how quickly did you pay them off? If you have some history that indicates your likeliness to pay back loans in the future, this can affect your score, as well as making you more attractive to lenders.
- Public Records - UCC filings and other reports including liens and judgments against you.
- Industry Risk - Some industries like bars and restaurants are historically riskier than others, and lenders view them differently based on historical data.
If you own the business, you can request a copy of your D&B report (for a fee) by calling 1.800.333.0505. Generally speaking, rating agencies pay attention to signs that you are trying to improve your business credit by paying your bills on time, applying for and holding business credit cards, and paying them off on time. They also pay attention to the relative stability of your business and whether or not you are consistently growing revenues and profits. All of these factors affect your score.
How are Business Credit Scores Used?
Small business lenders rely on business credit scores from multiple credit rating agencies to decide whether or not to make loans to small businesses. The business credit score also helps lenders determine the size of a loan they are willing to make. Lenders look at factors like whether your business has been paying previous debts on time, how quickly you pay suppliers and how much revenue you’ve been bringing in over time.
Business credit scores provide them with recalculated ways of determining the “creditworthiness” of a business. High scores mean a business has been diligent in making payments to others while a low score sends up a red flag. Lenders need to know how likely it is that a business will repay the loan they are granting on a timely basis. The various rating agencies provide historical information that the lenders can access prior to making their lending decisions.
Like it or not, business credit scores are an important tool most small business lending companies use to decide whether or not you will get the loan you need. Most of the time, lenders consider both personal credit scores and business credit scores, paying attention to all the factors discussed above.
Your small business' credit history also follows you from one business to another and records may become inaccurate over time so it is a good idea to maintain detailed records, even if one business closes and you open another one.
What is a “Good” Business Credit Score?
At the end of the day, this is perhaps the most important question in this article. Unfortunately, it’s one of the most difficult questions to answer directly because every lender has their own formula for deciding when to grant credit.
Most small business lenders like to see a business credit score above 75, but local lenders may consider lower scores for small businesses or startups. Conventional consumer financing companies rarely make loans to individuals with credit scores below 500. If you are willing to pay higher interest rates with stiffer payment terms, there are other options available.
This chart from Nav.com provides a helpful understanding of how small business lenders make their lending decisions. As you can see, a business credit score “in the red zone” is in trouble. You do not want your business in the red zone when it comes to credit reporting.
Learn more about what really goes into a business credit score.
Understanding Business Credit Reporting
Reporting Agencies: Who Are They and How Do They Track Your Business Credit Score?
Nearly all small business lending institutions rely on Dun & Bradstreet (D&B) PAYDEX® scores as at least one of the tools they use to decide whether or not to grant credit. Your D&B PAYDEX® score is based on how quickly your business pays its bills, and collects lots of additional information beyond payment data.
Here is a link to a sample Dun & Bradstreet Business Information Report showing PAYDEX®, D&B Rating, Composite Credit Appraisal and D&B Viability Rating. Dun & Bradstreet compiles a tremendous amount of information about every small business that has been issued a “D-U-N-S® Number.” They collect this information from public records, personal telephone interviews with the business itself, and with other companies who conduct business with the company being rated.
A Dun & Bradstreet report provides the following information in detail:
- Biographical information including your business address, phone number and D-U-N-S® number
- Executive summary with year started, number of employees, working capital, annual revenues, and net worth
- Overall D&B Rating and D&B PAYDEX® score
- Multiple “Viability Ratings” based on D&B proprietary calculations that consider risk, comparison to other companies in the same industry, and others
- Your business history, including profile data on previous and existing ownership along with personal data on you and other key executives
- Business Registration such as where your company is incorporated
- Government Activity Summary that shows publicly available information from the federal government
- Operations data including industry information, the number of employees you have, your facilities and locations
- SIC (Standard Industry Classification) and NAICS (North American Industry Classification) Codes
- Tree diagram showing corporate linkages with parent companies and subsidiaries
- Comparative Financial Statements and Key Business Ratios including Return on Sales, Quick Ratio and Current Ratio
- Public Filings on any liens, judgments, UCC (Uniform Commercial Code) and other publicly available reports
- Detailed financial statements
Lenders also use information from Equifax and Experian to make lending decisions. In these cases they are basing their decisions on composite scores from different sources.
Although not nearly as extensive as D&B PAYDEX®, Experian’s Intelliscore PlusSM compiles a collection of both business and personal statistics to predict whether or not a business will default within the next 12 months. Once again, businesses do not want to be in the “red zone” when being considered for small business financing.
FICO® LiquidCredit® is delivered by the FICO Small Business Scoring Service (SBSS) and is yet another scoring system that business lenders will rely upon when making small business lending decisions. The FICO SBSS score is specifically used by the Small Business Administration (SBA) when businesses apply for loans of up to $350,000.
Business lenders also look at UCC-1 Filings when granting credit. The UCC is important to understand even though it is not a credit agency; it stands for Uniform Commercial Code. A “UCC filing” is a legal form issued by a creditor when they sell property, a piece of equipment or other asset to a business. The creditor may take out a lien against the equipment. If they do, the lien is filed publicly to protect the interests of the lender. Should a business default on the lien, the creditor may seize the property or asset. If you have a history of default, this may hurt your credit and reduce your chances of getting approved for financing later.
How Private/Public are Business Credit Scores and FICO Scores?
While personal credit scores are kept private for legal reasons, business credit scores and FICO scores are considered a matter of public record and are easily accessed by banks, auto dealers, realtors, suppliers and customers. Bad credit reports follow your business wherever you go and can definitely work against you and your ability to conduct business.
What If I Find a Mistake on My Business Credit Report?
You can contact the various business credit score rating agencies directly if you ever find an error in your business credit score or FICO score reports.
We suggest that you keep an eye on the publicly available financial information about your business including business credit scores & business FICO scores. Because these scores are dynamic and change on a regular basis, business owners should make it a habit to check your business credit score and FICO score at least a few times per year, or once per quarter.
Even if your business credit score is high, you should monitor changes because it definitely affects the creditworthiness of your business. If you do find and report an error, it may take several weeks or even months before the various reporting agencies completely remove those errors from your record.
Paying bills on time and maintaining a good credit utilization record is prudent for many reasons and especially so when it comes to maintaining good business credit scores. Besides the small business financing companies, suppliers and even prospective customers look at business credit scores and FICO scores before entering into relationships or conducting large transactions with prospective business partners.
Where Can You Check Your Small Business Credit Scores for Free?
Both personal and business credit scores are available from a number of online sources. However, you may have to pay for them. With personal credit scores, it’s a legal requirement for the credit bureaus to provide you with a copy of your credit report for free. However, there is no such requirement for business credit scores.
You can do an online search for “free business credit report,” but you may encounter some scams. There are some websites out there that will promise you a “free report” in order to get your personal information. Make sure that you only share your information with a reputable website or company. We recommend that you contact each of the rating agencies and Dun & Bradstreet directly. You can obtain a copy of your D&B report for free.
- Get your Equifax report
- Request a copy of your D&B report by calling 1.800.333.0505
Improving Your Credit Score
Q. How Can I Improve My Business Credit Score or FICO Score?
Maintaining a good business credit score can be stressful, but it’s worth it. It may seem difficult in the beginning, but once your business is established, it is a matter of creating good credit relationships with business lending agencies, suppliers and customers.
Make sure all bills are paid on time or earlier and pay special attention to payments on secured assets that have (UCC) Universal Commercial Code filings associated with them.
A business can actually improve its business credit score by taking on debt even if it doesn’t need any money right now. Credit rating agencies want to see a track record of taking on debt and paying it back. Specifically, rating agencies look at how many business credit cards you use and what other kinds of loans may be outstanding, along with how quickly you pay them back.
Most rating agencies want to see that a business has a decent credit line but only uses about 25% of their available credit. Avoid maxing out on credit card limits by adding multiple cards.
For some additional information about how to improve your business credit score, read our article about six hacks for building your business credit.
Q. What Can Affect your Small Business Credit Score?
Just like with personal credit, your business credit score stays with you forever. Missing payments or taking on too much debt sends up a red flag to the rating agencies and prospective lenders. Frequent changes in ownership, restructuring, late filings of tax returns, switching banks and moving also cause a lending institution to think twice before granting credit.
The absolute best way to maintain a good credit score is to establish a credit line with a financial institution and take out funds against that line when your business is doing well. Showing a solid track record of paying down lines of credit, equipment loans, and credit cards on a timely basis is a way to insure that your business credit score stays in the “green zone.”
How Fundbox Views Credit Scores
At Fundbox, we firmly believe that every business should work hard to establish small business credit, to maintain a good business credit score and work to keep their FICO score as high as possible so they can secure small business financing when they need it, on the most favorable terms possible.
Having said that, we think there is a lot more to success than a good business credit score. We offer some very good news for businesses looking to secure small business financing who do not have excellent small business credit, have a less than perfect business credit score, have a FICO score lower than most lending companies require, or who do not wish to mix business and personal finances.
One of the reasons small business owners like working with Fundbox to get access to business credit, is that we do not rely solely on credit scores to make credit decisions. Instead, we use our AI to assess business performance across many different factors without ANY paperwork. That means we can serve small businesses no one else can, and we can do it fast. Instead, we look at small businesses as more than just a number: we review your business transaction history and business data, so you can qualify for credit based on a more relevant set of information about your business.
As a fin tech (innovative financing) leader, Fundbox offers many advantages over conventional lenders and we offer small business financing for businesses that either don't want to entangle their personal and business finances, who qualify with other small business financing companies, or simply don't want to go through the time-consuming hassle of applying for a conventional term loan.
At Fundbox, we understand that you have a business to run. When you need small business financing, you need the process for applying and getting approved for small business credit to be as simple and straightforward as possible. Our process is as simple as signing up online in seconds, and getting a credit decision in just hours – simply provide some basic business details and a link to your accounting software or bank account. If approved, you get access to funds up to your credit limit, delivered as soon as the next business day.