A Complete Business Credit Score Guide
As the owner of a business, it's important that you understand how a business credit score works. This credit score is essential for determining the financial health of a company. Having a strong credit score for their company offers business owners many advantages. New business owners are sometimes uncertain of how a business score works.
In some ways, business credit scores work similarly to personal credit scores. Yet there are some key distinctions that business owners need to be aware of. It can take time to establish business credit. A new business is not likely to have much of a credit history. While it takes time and effort, it's essential for business owners to work toward strong credit for their company. It's easier to grow a company if its credit score is strong. This makes it a more simple matter to acquire financing.
A Complete Business Credit Score Guide
Business owners should understand the factors that impact the credit score. They should also know what they can do with strong credit. Below is an explanation of business credit scores and key information business owners should have regarding business credit.
What is a Business Credit Score?
A business score is similar to a personal credit score. Business credit scores rate the credit-worthiness of businesses the way that personal credit scores rate the credit-worthiness of individuals. Financial institutions will look at the credit score of a company when evaluating the company for a loan.
Credit scores for companies are meant to represent how likely a company is to repay its debts. The higher a company's credit score, the more financially sound the company should be. A company's credit score is determined by numerous factors.
Importance of a Good Business Credit Score
A good business credit score is important because it helps qualify companies for loans. Business loans provide companies with capital. This capital allows companies to make purchases. With a business loan, a company can invest in itself. For example, a company can buy a new piece of equipment. With investments like this, companies can grow and take advantage of opportunities.
Business credit scores could also be considered when it comes to insurance. An insurance company will look at a company's business credit score before providing that company with commercial coverage.
Acquiring capital through business loans
Taking out a business loan is a common way for companies to get capital. A company applies for a business loan much like an individual applies for a loan. Companies provide information on their business and credit history to the lender. The lender then decides whether to approve the company for the loan. Young companies often struggle to acquire capital through loan approval.
Loanry
Loanry is a resource that can help companies searching for opportunities to borrow. Loanry connects companies with lenders. Loanry also makes it easier for companies to manage debt once they borrow. With Loanry, companies can manage existing loans. They are also connected with information on opportunities to refinance their business loans. Loan payments must be factored into the company budget. Keeping up on payments is essential for improving business credit. Loanry resources conveniently allow business owners to make sure they're keeping up on business loan payments.
Factors that Impact the Credit Score of a Business
In order to establish credit, business owners need to understand how credit is determined for companies. In a lot of ways, credit score for companies is determined much like a credit score is determined for consumers. However, there are some noteworthy differences business owners might want to be aware of.
The company's reliability to make on-time credit payments in the past
A credit report for a company contains a record of any late or missed payments in the past. Missing a payment due date on a business loan could negatively impact credit. Late payments show that a company is less reliable. This makes that company less attractive as a borrower to a lender. Making on-time payments is one of the simplest things to do to establish business credit.
The company's use of debt
Companies that are heavily reliant on debt generally have poorer business credit. Business credit bureaus will look at how much credit a company has available. They'll also look at what percentage of that available credit the company is using. If a company seems heavily reliant on borrowing, it indicates possible financial difficulties.
Companies sometimes can rapidly increase credit scores by bringing down their debt load. Paying off an outstanding debt minimizes the amount owed in relation to available credit. Companies with funds available to pay existing debts should do so when possible to raise their credit scores.
The length of time the company has been in business
A company that has been in business longer is more established. A new company is seen as more of a risk to lenders. This means that companies may need to be patient to enjoy strong credit.
Not only is the length of time in business an important factor, but the length of the credit history for the business is also important. That's why it's important for companies to start establishing credit right away.
The risk implied by the industry a business operates in
Business credit bureaus sometimes consider the riskiness of a company's industry in determining a credit score. An industry with a profitability that varies significantly over time is viewed as risky by lenders. If a company operates in a riskier business, that company's revenues in a given year may be more uncertain. This means that a company in this industry could be more likely to default on a business loan.
Some companies might face obstacles to establishing strong credit because of their industry. However, this is often a more minor factor in determining a company's credit score.
The size of the company in question
The size of a company could be considered as a factor in determining a credit score. Larger companies tend to be more established and secure. They also tend to have higher revenues. Therefore, credit bureaus can give higher scores to larger companies. Growing your company over time will help improve its credit score.
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Differences Between Business Credit Scores and Personal Credit Scores
Personal and business credit scores are similar. However, they differ in some significant ways. For one thing, the scale for measuring credit is different for businesses. A personal credit score is given on a scale between 300 and 850. On the other hand, a business credit score varies between 1 and 100.
Another difference is that a business's credit score is not looked up by social security number. Individuals have social security numbers. However, companies have employer identification numbers (EINs). A company's credit score is attached to its EIN.
The credit bureaus Experian and Equifax track both personal and business credit scores. However, the credit bureau Dun & Bradstreet is a credit bureau that only tracks the credit scores of businesses.
Credit Bureaus for Businesses
There are three major credit bureaus that provide business credit scores. They are Dun & Bradstreet, Experian, and Equifax.
Dun & Bradstreet
Dun & Bradstreet relies mainly on the payment history of a business in determining credit score. This credit bureau uses the PAYDEX score, which goes from 1 to 100. Companies generally need to have a score of at least 80 to be considered low risk for a business loan according to this scale.
Experian
Experian is a major credit bureau in the United States. This credit bureau tracks both consumer and business credit scores. Like the Dun & Bradstreet credit bureau, Experian also uses a scale that ranges from 1 to 100. Experian uses factors including credit utilization, payment history, public records, and account balances to determine the credit score of a business.
Equifax
Equifax offers credit reports for businesses. This credit bureau tracks credit scores for companies according to payment history and debt load. Equifax offers business owners a report that includes a business credit risk score as well as a business failure score. The business failure score predicts how likely it will be for a company to go out of business.
Steps to Go Through to Build Business Credit
Establishing good business credit is a long process. It won't happen overnight. There are several steps to this process. Companies need to follow through with these steps over the long term. Any business can suffer setbacks over time. This could lead to difficulty in making loan and credit account payments.
Making it a priority to maintain strong credit is essential for business owners. A low business credit rating can compromise a company's financial longevity. The following are five of the most important steps to go through to establish business credit.
Register your business
A company must be legally registered to have a credit score. Registering with the IRS provides a company with an employer identification number. Business credit scores are attached to this number.
Open up business credit accounts
Companies need to establish business accounts to build credit. They should have both a business bank account and a credit account. Companies could potentially find a secured credit card for their business if they are not approved for any unsecured credit accounts initially.
Make sure your lenders are reporting to all relevant credit bureaus
A company will not build a credit score if no information on their credit accounts is being reported to the bureaus. Business owners should verify that their lender will report their history to the credit bureaus before opening a credit account.
Make all payments promptly
The number one thing business owners need to do to build credit is to make payments on time. Budgeting well for a company is important. Whenever possible, business owners should make automatic payments. It can be easy to overlook a payment with all a business owner's other responsibilities. Some lenders will give businesses grace periods that help in case of late payment. However, some lenders might report a payment to the bureaus even if it is only a few days late.
Review your business credit report and check your score periodically
You need to be conscious of updates to your credit score. Checking your company's credit report periodically is important to forming your credit building strategy. When you review your credit report, you can determine any issues that are keeping your score down. For example, you can find out if you need to reduce your debt utilization to bring up your score. You can also look for errors on your business credit report. There are sometimes mistakes in reports that bring a company's score down. You need to have these errors corrected for the best possible score.
Those who own their own business shouldn't underestimate the importance of credit. Business credit has a big influence on company activities. A limited business credit history limits a company's immediate prospects. Not only is business credit important when it comes to loans, but it's also important in terms of business partnerships.
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In Conclusion
Knowing how business credit works is important for building credit. You won't acquire a credit history if you don't use credit. Establishing your company and then opening up business credit accounts is essential. Since credit history length is a key factor, starting right away with credit building is important.
Get started today building your business credit score! With time, you'll be able to grow your company. Strong credit will make the job of running your company easier. Good business credit opens up a lot of opportunities for business owners. You'll be able to acquire funding so that you don't have to miss out on opportunities. Improve your business prospects with a good credit score.