How Does Your Business Credit Score Work?
Your business credit score can be the key to unlocking important financing opportunities for your business, so understanding what your business credit score is, how to monitor it, and what makes it fluctuate is critical.
Here’s how and where your business credit score is generated, plus what you can do to take control of your score.
What goes into calculating your score?
Much like a personal credit score, your business credit score is calculated by various credit bureaus and is a reflection of your business’s financial trustworthiness. Repayment history, credit utilization ratio, length of credit history, company size, and tax liens or bankruptcies, among other factors, all play a role in determining your score.
Generally speaking, those who have a strong track record of responsible repayment will have the highest credit scores, whereas those who are often tardy in making payments or who have had major financial issues, like a bankruptcy, are going to have lower scores.
Who generates your score?
There are three major credit reporting agencies for business credit: Dun & Bradstreet, Experian, and Equifax.
Dun & Bradstreet and Experian use a scale of 0-100 whereas Equifax offers three different assessments for businesses: the payment index (scores range from 0-100), the credit risk score (scores range from 101-992), and the business failure score (ranging from 1,000-1,610).
While the scores from these three reporting agencies are on a similar scale, the metrics and algorithms that each agency uses to generate their scores are unique, meaning that you can have a slightly different credit score with each agency.
Why is your business credit score important?
A major difference between a business credit score and a personal one is that business credit scores can be pulled by any interested party. If you’re applying for business financing, the lender will pull your score to get a sense of how trustworthy you are as a borrower; however, outside of lenders, your competitors or potential clients can pull your business score as well.
Competitors may pull your score to get a sense of the strength of your business. If you’re struggling to make repayments, they may take that as a sign that your business is not doing well and use this information to begin targeting your client base.
A potential client may be interested in getting a sense of the financial health of your company so they’re not left high and dry if you fall into financial trouble.
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How can you manage your score?
The most important thing you can do to maintain a strong credit score is to be diligent about repayments. Whether it’s your monthly credit card statement or the weekly repayments on your short-term loan, making sure that you’re not falling behind and are paying your balance in full is critical to preserving a strong score. Additionally, having business credit cards (and paying them on time) to ensure that your credit utilization ratio is staying below the 30% mark will help to keep your business score in a desirable range.
It’s important to make sure you’re not overextending yourself financially. Before taking on debt, calculate your debt service coverage ratio to ensure that you’ll have adequate funds on hand to repay the loan. The biggest black marks on a credit score come from major financial gaffs, including liens, bankruptcy, and judgments.
Should you monitor your own score?
While being responsible with your repayments is critical, it’s also important that you look at your credit report on a regular basis. Unlike with your personal credit score, there is no law entitling you to a free annual report, so you will have to pay to see your business score. If cost is an issue, you can alternate pulling scores from each of the three major reporting agencies on a semi-annual basis.
Pulling your own score periodically is critical because it allows you to see the influence your financial decisions are having on your score, and it gives you the opportunity to take note of any errors in reporting or potential fraud. If your score is much lower than you anticipated, be sure to look through the repayment history to see if something has been incorrectly reported or if there is someone else seeking financing under your business’s name.
Your business credit score can have a major influence on the financial health of your company. Your ability to secure financing is critical as a business owner, so understanding and monitoring your business credit score is an important piece of the financial puzzle. Responsible repayment, understanding your financial limits, and regularly monitoring your business score will allow you to maintain a healthy credit score that will give your business the financial flexibility it needs in order to thrive.
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