Learning the ins and outs of business credit can help you build a strong credit history for your business apart from your own.
It's natural to assume that a business credit score is just the business version of a personal credit score, but it's more complicated than that. Once you start a business, you're playing by a new set of credit rules. Learning the ins and outs of business credit can help you build a strong credit history for your business apart from your own.
What determines your business credit score?
Although personal and business credit scores have several things in common, there's more of a learning curve with business scores. It doesn't take long to understand personal credit scores, because the three reporting agencies all use similar factors to calculate scores and have scoring ranges from 300 to 850. The same isn't true with business scores.
These are the different types of business credit scores and the scales they use:
- Dun & Bradstreet’s PAYDEX (0 to 100)
- Equifax's business failure score (1,000 to 1,610), credit risk score (101 to 992) and payment index (0 to 100)
- Experian's IntelliScore Plus (0 to 100)
- FICO’s SBSS (0 to 300)
The Dun & Bradstreet PAYDEX and Equifax payment index are unique in that they rely entirely on your payment history. To achieve a maximum PAYDEX score of 100, you even need to pay your credit accounts 30 days or more ahead of time.
The reporting agencies determine the other scores using your payment history and a combination of factors. Some factors are the same as those used in calculating personal credit scores, such as credit utilization and how long your business has had its credit accounts.
Other factors are specific to business credit scores, including the size of your company, its time in business, and the level of risk associated with your industry. The reporting agencies may also use public records in calculating scores.
Unlike the other reporting agencies, FICO uses both your personal and business credit histories when calculating its SBSS score.
Improving your business's score
Before you can improve your business's credit score, you need to incorporate. This sets up your business as a separate legal entity from you. When you have a sole proprietorship, you and your business are one and the same, making it impossible to build a business credit score independent of your personal score.
After you’ve done that, obtain at least one form of business financing. For most new business owners, the best and most convenient option will be a business credit card. If your business has any suppliers or vendors it uses on a regular basis, ask them to report your payment history to the credit agencies.
Follow the same strategies with your business credit that you would with your personal credit. Keep your credit utilization as low as you can and aim to always have it under 30 percent. Pay everything on time or earlier if possible to achieve the highest-possible PAYDEX score. Avoid letting any accounts become delinquent.
The importance of a business credit score
Building your business credit score is well worth the time and effort. The most significant benefit is that it reduces the risk your business presents to lenders and suppliers. Business loans are notoriously hard to get, but you'll have a much better chance at approval with a good business credit score. And when you're approved for any type of business financing, a good score helps you get favorable terms, such as a large loan amount or a low interest rate.
For your own financial security, it's wise to have separate credit profiles for yourself and your business. Otherwise, financial issues with your business could negatively affect your personal credit score.
You also have your business's reputation to consider. No one can check your personal credit score without getting your permission first, but authorization isn't required to pull a business credit report. A potential partner could do so as part of their evaluation process. You never know who will decide to run your business's credit, and a good score presents a professional image.
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Start early with your business credit
One thing both personal and business credit have in common is that the sooner you start working on them, the better. Although a business loan may be out of reach if you're still in the early stages, a business credit card starts building that credit history, which can pay dividends down the road.