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Business Credit Scores Are Vital

As a small business owner, it’s vital to establish a good credit score. This is especially crucial when starting a business, as you likely won’t have enough cash on-hand to afford all your business expenses. This includes startup costs like equipment, advertising, inventory, and payroll.

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If you want to apply for financing to afford necessary expenses, you’ll need a decent business credit score. Most lenders will consider your credit score when reviewing your application for a loan or consumer credit, so it’s imperative that you improve or maintain your score, depending on your current financial standing.

Even if you get approved for financing with a low score, you’ll likely receive worse terms than a business with a high score. This could hurt your business, as the funds may be too expensive, and it could take a long time to pay off your debt.

To understand the benefits of having a good business credit score, keep reading!

What is Considered a Good Business Credit Score?

Before we review the importance of having a good business credit score, you should understand what a good credit score is.

Most business credit scores range from 0-100, but different business credit bureaus have their own scoring models. Below, we’ll review the most popular business credit reporting agencies (Dun & Bradstreet, Experian, and Equifax) and what they consider to be a good business credit report and score:

  • Experian: When checking your business credit score from Experian, you’ll want to be in the 76-100 range, which is considered a low credit risk score. On the opposite end of the scale, 1-10 is considered a high-risk score. If you fall in this range, you’ll need to improve your score as soon as possible.

  • Equifax: Equifax scoring system works a little differently than other bureaus. They assign businesses three scores in their credit reports. These scores measure the following areas:

  1. Traditional Credit Risk Score: This ranges from 100 to 992 and gives an overview of your business’s credit history.

  2. Payment Index: This score, which ranges from 0 to 100, reflects your payment history. If you’ve paid bills on time and responsibly manage your finances, your score will be closer to 100.

  3. Business Failure Score: The final score that’s included in Equifax Business Credit Reports rates your business based on the likelihood that you’ll go under or dissolve. This score ranges from 1,000 to 1,000.

  • FICO SBSS: For this credit index, you should aim to have a higher score instead of a lower score. The FICO SBSS scores range from 0 to 300, and you’ll want to have a score of at least 160 in order to apply for bank financing.

  • Dun & Bradstreet PAYDEX: Your PAYDEX Score will fall between 0-100, but you’ll want to have a score between 80 to 100, which is considered good. 0 to 49 is considered a bad rating, so you’ll need to start making payments on-time to improve it.

Why Having a Good Business Credit Score Matters:

1. It’ll Be Easier to Qualify for a Loan

One of the biggest advantages of having excellent business credit is the ease in which you can qualify for a small business loan. Lenders are hesitant to lend money to businesses with poor credit history for fear that they won’t be able to make their payments on time, or at all. As a business with an exemplary credit score, you’ll likely be able to get a loan quickly and painlessly!

2. You’ll Receive Better Loan Terms

Typically, lenders will be more likely to offer favorable loan terms for businesses that have proven their creditworthiness.

For example, you could leverage your great credit score to negotiate much lower interest rates and larger credit limits. Better terms can greatly benefit your business. For instance, lower interest rates will save your business thousands of dollars in interest payments!

3. It Protects Your Personal Finances

With business credit, you can separate your personal and business financial obligations. Your company debts will be reported on your small business’s credit reports, saving your personal credit rating from being impacted from any financial woes your business may face, and vice versa.

Of course, it’s still important to review your personal credit report. When you apply for a loan, lenders may want to review your personal credit score in addition to your business’s credit report.

4. You’ll Receive Better Terms from Suppliers

Once you’ve established great business credit, not only will this help you when you apply for business financing, but it also bodes well for the credit terms provided by suppliers.

When it’s time to purchase additional equipment and inventory, consider purchasing on credit. If your suppliers can trust that your business is financially stable and capable of repaying debts in a timely manner, they’ll be more comfortable in forgoing prepayment and allowing you to purchase on credit.

5. Get Access to Cash for Growth and Expansion

Even if your business can meet its current financial needs without credit, what happens when you decide to expand your operations?

For instance, taking out a loan for a business expansion project will allow you to expand your business larger than initially imagined. Whether the expansion involves new facilities, equipment, or inventory, a loan can help you get started.

How Your Business Can Achieve a Strong Credit Score:

Now that you understand the importance of maintaining a good business credit score, take time to form healthy financial habits. Without monitoring your business’s finances, you won’t be able to improve or maintain your score.

  • Pay Bills on Time: Make it a priority to pay bills in-full and on-time. By doing that, credit bureaus will see that you’re responsibly managing your finances, which will reflect in your business’s credit score.

  • Reduce Existing Debt: It can be challenging, but to improve your score, you’ll need to focus on fulfilling your financial obligations. That means paying off your business’s credit card debt, repaying your vendors, and getting rid of any other outstanding balances.

  • Check Your Scores Frequently: Set a reminder in your phone or write a note in your planner to periodically check your credit. Reviewing your credit report will help you recognize any mistakes or issues.

  • Handle Tax Liens: If you’re issued a tax lien, it can have serious repercussions on your credit. Due to this, you should pay your tax lien in full as soon as possible. In addition, you may want to pursue subordination or a withdrawal, which can help you remove the tax lien from your public records.

Conclusion: Make Your Business Credit History a Priority

Overall, it’s evident that there are many benefits to having a strong business credit score. Whether you own a new business or a well-established operation, it’s important to build your that credit score so that you can pursue business success for years to come.

Editor’s Note: This post was updated for accuracy and comprehensiveness in September 2020.

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