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A good credit profile makes a huge difference in the financial success of any business. How a business maintains its credit is reported to credit bureaus just like personal credit. Likewise, this information is used to create a numeric business credit score, which lenders use as an indicator of creditworthiness. A solid score also builds up the company’s reputation in the business community.
As with individual credit scores, low numbers can lead to credit application denials, high interest rates, and additional fees when a business applies for credit. A higher credit score indicates that the business is a low-risk reliable borrower which can be an invaluable business asset. Although individual credit ratings are equally important, there are some key differences between personal and business credit scores.
There are some similarities between personal and business credit reports and scores. For instance, a consistent timely payment history will raise both types of scores. Additionally, each type of credit report should be reviewed regularly for errors that can affect the score. However, there are several distinctions between the two, which include:
The majority of business credit scores and reports include only accounts that are listed under the legal company name. However, some small business lenders will take the personal credit score of an applicant into consideration when making a decision.
It is not unusual for a brand new business owner to use personal credit to get started. Items such as licensure, equipment and other necessities may be needed long before the company establishes business credit. The owner’s personal credit cards and lines of credit may be the only way to get the doors open. Even so, there are a number of reasons a company should strive to establish a separate business score, including:
The expenses to start up a company add up very quickly. Initially, using personal credit to get the business off the ground might be a necessity because the owner has no other options. Eventually, building a good business credit score should become a priority in order for the company to build a strong business presence.
The three major business credit bureaus are:
Equifax and Experian calculate credit scores for individuals as well as business. Dun & Bradstreet provides analytics and commercial credit data for businesses only. Dun & Bradstreet utilizes a nine digit DUNS (Data Universal Numbering System) identification number as a business identifier. Lenders and potential investors reference the number to determine the creditworthiness of a business. Below is a brief overview of the scoring methods of each of these credit bureaus.
Dun & Bradstreet:
The credit risk of a company is measured by a Paydex score of zero to 100. The number is based upon reported payment history data. A combined commercial credit score and financial stress score determine whether lenders will extend credit.
A commercial credit score is the predictor of delinquency with a range of 101 to 670 (the lower score means higher probability of a delinquency). The financial stress score is a predictor of the likelihood the business will fail within one year, meaning an unpaid loan was either settled or the company closes without full payment to creditors.
Experian:
Experian offers a comprehensive report from a database of over 27 million businesses called the CreditScore. The in-depth business credit score report includes not only scores, but facts about the business such as registrations, contact information, and insurance data to name a few items.
In addition to payment history, Experian calculates business scores using credit data from suppliers and lenders. Legal filings, business background information, and public information are also reflected in the score.
Equifax:
Equifax offers three types business credit assessments:
The list of factors that bureaus consider when scoring business credit is exhaustive. However, all credit bureaus do consider issues like age of the oldest account, types of transactions, and credit utilization.
A business credit report should be examined on a regular basis to ensure the credit history is accurate. Since each credit bureau collects credit information differently, it is important to pull a report from each bureau. Although business credit bureaus claim to verify information, there can still be mistakes in the report which can be corrected by providing evidence to support the inaccuracy.
The report should be checked sooner if the owner will be applying for a small business loan or financing business equipment in the immediate future. Some bureaus also offer statistics that compare the credit rating of other businesses, which can be useful information for making financial decisions regarding business credit.
There are proven benefits to having a business credit score for any size company. But what if a company has damaged its business credit score over a period of time? Just like personal credit, it is possible to improve a poor credit score. Some suggestions include:
Settle any legal suits over unpaid debt.
Ask vendors and suppliers to report timely payments to the credit bureaus.
Make sure that settled suits are removed from the credit report.
Keep written documentation of good credit references and make sure they are reported.
Above all else, accounts should be brought up to date and kept in current status. Business owners should not make payments late, and especially avoid missing an account payment for more than three months. Bouncing checks and going into collection status will also bring scores down to unacceptable levels. Working to build and maintain solid business credit is basically the same as personal credit, with matching rewards and advantages for the effort.
