Do you know your business credit score? As a measure of your company’s financial health and credit history, your business credit score plays a key part in your company’s profitability. Lenders and suppliers will be taking a look at this number during their due diligence process. Think about that for a moment. Your credit score may influence someone’s decision about whether or not to do business with you; and if they opt to pursue the relationship, it could define what the financial aspects of that arrangement might look like.
What Determines Your Business Credit Score?
Your business credit score is connected to your Employee Identification Number (EIN). Public data – such as financial information reported by those with whom do business – and your own self-reported data will be used to determine your credit score. Here’s where it gets a little tricky: Your business credit score may vary, depending on which credit agency calculating the score. The four most commonly used scores include:
- Dun and Bradstreet Paydex Score: By evaluating your payment history (which includes payments associated with loans, as well as suppliers), D&B uses a 1-100 scale to indicate your company’s ability to pay its debts (past and future). The higher the number, the better the score. A score greater than 80 is considered good.
- Experian: Although this report also paints a picture of your financial health using a scale of 1-100, it draws on more than your payment history. Experian will also assess legal filings, public records, and collection agency data. A good score is one greater than 75.
- Equifax: This report begins by drawing on similar data to the Experian report. That’s where the comparison ends. Equifax gives your business three scores: a payment index score, a credit risk score, and a failure risk score. Here’s the breakdown:
The payment index score is measured on a 1-100 scale. This measures your payment history to past creditors during the last year. A score greater than 90 is considered good. The business credit risk score indicates the risk of your company becoming severely delinquent on future payments. It’s measured on a range of 101-992, and anything more than 700 is considered a good business risk score. Finally, the business failure score measures your business’s risk of becoming insolvent within the next year. This is calculated on a scale of 1,000-1,880. Scores greater than 1,315 are considered good.
- FICO SBSS Credit Score: This number is generated based on the three previously mentioned credit bureau scores. Small Business Scoring Service (SBSS) is used to approve Small Business Administration Loans. It’s evaluated on a range of 0-300 and again, the higher your score, the better.
Building and Maintaining a Healthy Business Score
Although someone else is doing the digging and assigning a score to your business, you can take steps to ensure the health of your business finances. The following six steps will help your business maintain a strong credit rating:
- Pay your bills on-time (or even early). Remember, each of the aforementioned credit bureaus are specifically looking at your payment history and they are looking to see whether or not you’re paying them before or near the due date.
- Establish and maintain separate personal and business accounts. That’s worth repeating. Don’t mingle your personal funds with your company’s funds. Open a separate business checking account and use a dedicated business credit card. Your business accounts should be established using your EIN and not your personal social security number.
- Ask your suppliers and lenders to report good payments. Don’t assume your vendors are reporting. Some do, some don’t. When you’re establishing your vendor relationships, determining whether they’ll report your good payment history to a business credit bureau should be part of your due diligence.
- Don’t overextend yourself with credit. Whether you are drawing from an extended line(s) of credit and/or using a corporate credit card(s), don’t max out. You want to maintain a low credit utilization ratio.
- Monitor your business credit reports and correct any errors and/or fraudulent activity you find. Each credit bureau has its own policy on how you’ll need to dispute errors on your business credit report.
- Likewise, monitor your personal credit. Yes, you want to keep your personal and business finances separate, but as a small business owner, your personal credit score can impact your company’s ability to secure small business loans. The steps outlined above for your business credit score also apply to building and maintaining a healthy personal score.