Business credit scores: what are they and how will they affect your loan.

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Anyone that runs a business knows that cash flow is one of the most challenging components of keeping your business running smoothly. On paper, the balance sheet might look great, but the asset you need to tap to pay employees is a big line item called “accounts receivable.” For example, a manufacturer may have a lot of value tied up in finished goods, but delivery dates might not be for thirty days. Financing is an important part of growing and maintaining your business, in large part because it allows you access to cash between billing and payment cycles.

When you decide it’s the right time to apply for financing, a big player in determining eligibility will be your business credit score. If you are unfamiliar with your score, or how it will affect your lending options, read on.

What is a business credit score?

While a personal score serves as a financial rating for you as an individual, a business credit score ranks the creditworthiness​ of your business. Credit agencies use several factors to calculate your scores including your credit utilization ratio, or the ratio of credit used in relation to the amount of credit available. They will also look at your business payment history, outstanding debts, and public records, such as bankruptcies, liens, and judgments.  The size of your company and the length of your credit history will also affect your score.

Why is knowing my business credit important?

In addition to providing lenders with a sense of your business’s capability to repay a loan, a strong business credit score can lead to lower insurance premiums and interest rates.  It can also help you get approval for a lease or a business loan, as well as helping you to secure better terms from vendors. That is why it is important to take the time to build up your business credit score, as it may open doors to greater amounts of capital and improve the resources available to you.

Business credit can also help separate your personal finances from your business’s finances. Initially, you may be directly responsible for a personal guarantee when taking out a business loan or opening a business credit card. This puts your personal assets at risk if you are unable to repay your loan. However, once you establish a strong business credit score you may qualify for a business loan or credit without a personal guarantee.

Finally, your business credit score will help you determine if you should try and obtain a score-backed lending option, such as a line of credit, or a collateral based loan, like an equipment or real estate loan.

How do I find out my credit score?

There are three agencies that produce business credit scores and reports. Dun & Bradstreet give the most in-depth report, including a credit summary and credit risk score, a PAYDEX score, financial stress score, and industry payment benchmarks. The cost for a Dun & Bradstreet score is $61.99 for a complete credit report. If you do use Dun & Bradstreet to find your credit score make sure to get a DUNs number, which lists you in the company database and sets up a credit file that lenders can use while you are applying for a loan.

Experian reports will include public records and a business failure score. While less comprehensive than Dun & Bradstreet these are the statistics that your will need to know when applying for financing options. They will charge $99.99 for a complete report.  

Equifax is the last major agency that offers credit scores. They are also the cheapest option, charging $36.95. For that price, they provide only the most basic information. FICO also offers their own form of credit score reporting, however the way they report those scores is very different, with a ranking of 0-300.

Each bureau has different methods for interpreting scores. The main agencies use a scoring system of 1 to 100, with a score over 75 or 80 meaning your business is at a low risk to lend to, and generally pays back debts on time or 20-30 days sooner than terms require.

Once you receive your score, review the data to make sure to that everything reported about your business is accurate. You can correct bad data and get credit bureaus to update information by submitting receipts directly to the reporting agency.

What to do if your credit score is low

If you score is low there are a few things you can do to improve it. Paying off any existing debts or credit cards on time or early will help increase your score over time. In addition, decreasing your credit utilization ratio will help. Common practice suggests it is best to keep credit utilization at around 15%. Finally, you can dispute any errors or inquires, which can help remove damaging items from your report.

If you still have trouble raising your score you can talk to your loan broker. Depending on what you need to finance, they may be able to help you find a loan or lease that relies on collateral rather than credit.  Our brokers can help you better understand exactly what your scores mean, how your score will affect your loan, and what the best options are to help you secure capital. Contact us for more information.

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