Complete Guide to Business Credit Score | BusinessLoans.com
Quick Overview
By Bradley Harris | Last Updated: August 24, 2022
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Whenever your business applies for any type of loan—be it a credit card, a line of credit, a business term loan, a business mortgage, etc.—having a strong business credit profile is critically important. Even though many business owners don’t realize they have both a business profile and a personal profile, the lenders do ,and you can’t afford to ignore them either.
One of the best ways to encourage lenders to look at something other than your personal credit profile is to focus on building a strong business profile.
What a Business Credit Score Says About Your Business
Your business credit profile is designed to reflect the relative risk of your business as a borrower— E.g., how likely it is that you will be late in making payments, or even default on a loan. Your profile plays an important part in getting you a “Yes” or “No” on a loan application — and if you’re approved, your score will influence the interest rate you’re offered. Keep in mind that your business credit profile is just one piece of the overall picture for the lender reviewing your application and some lenders look at a lot of other data in addition to your credit profile to evaluate your business.
Your business credit profile is compiled from a variety of sources, including:
Lending institutions will request your credit profile from one or more of the credit bureaus, and factor that information into how they evaluate your application.
What Influences Your Business Credit Profile
Ultimately, you control your business credit profile. It’s based on how you manage payments to your creditors, utilities, vendors, and tax obligations. The longer you maintain a track record of paying your bills on time, the better your profile will be. Credit profiles are very subjective and can change often as additional information is reported. Here are some of the specific components that go into your business profile:
This information and more is collected by the credit bureau and processed through various formula-driven analyses to create a profile, which measures the financial condition of your business and its capacity to manage additional debt. Business credit profiles are different than consumer credit scores in that different information is used to produce a unique evaluation of the business’ credit profile.
How Does a Lender Get this Data?
There are several credit reporting agencies that handle this data collection and analysis. The major business credit bureaus include:
You can check their websites for more information about what data is collected and how scores are determined. Each credit reporting agency has its own scoring method, including what information they collect, the algorithms used to weigh various data to create a “score,” and the numerical range they’ve established to report their information. Unlike personal credit scores, which are all based on a set numerical range (500 is low, 800 is high), your business credit scores may use a scale of 1-100 for one bureau, and a different scale with another.
NOTE: The information used by these credit bureaus is not guaranteed to be complete or correct. Your vendors aren’t required to send the trade payment information to them, and it’s easy for errors to be made by similarly named companies or incomplete information. The good news is that the credit bureaus want their data to be accurate and are willing to review and correct any errors on your credit report you identify. You can request a copy of your credit report and report any errors directly to the credit bureau. Business credit reports reflect transactions presumably completed using your business name, address, and your company’s federal Tax Identification Number (TIN). As such, it’s very important to establish and maintain a business identity distinct and separate from your personal identity.
The initial steps to doing this are to:
How Your Business Credit Score Is Used
Most lenders will consult your business credit profile (and for most small businesses, your personal credit score) before deciding whether to extend credit to your business. The lower your score, the “higher-risk” your business will appear in terms of repaying credit. Remember, lenders are looking for loans that will be profitable to them, so a bad profile or a lower personal credit score will likely mean that if you’re approved, you’ll pay a higher interest rate. Your business credit profile may also impact your company’s access to other business relationships, like trade suppliers, insurance coverage, and leasing agreements.
Track and Improve Your Business Credit Profile
Knowing your business credit profile isn’t difficult, but sometimes the steps to ensure it’s accurate and make corrections can be a long process. Start with these steps to find out what’s in your current report.
Make certain that your report is accurate. These reports may contain errors, such as another company’s identification or business account information, including negative experiences. You can and should do your best to correct them, although this may take time and effort. If errors do exist, be sure to inform any financial institution where you have a loan application pending that there are errors.
What can your business do to improve an existing credit profile?
To Sum Up
A strong business credit profile can make it a lot easier to obtain new credit funding. You can take control and improve your profile by diligent oversight of what’s included in your credit report, as well as responsible management of your business financial arrangements. Taking these actions will be worth it in the long run and will increase your odds of finding a small business loan.
