Your personal and business credit scores can impact your company's financial future.
Just as a good personal credit score is important to individuals, a strong business credit score gives you more negotiating power and funding opportunities to expand your business.
If your business is carrying too much debt, it will be more difficult to secure funding for your company. Alternatively, not using business credit at all can also be a detriment to your business credit history. There may also be interplay between your personal credit and your business.
While there are many different strategies to improve your business credit score, will paying off your debt – both personal and business – increase your business credit score?
The paradox of personal and business credit scores
Business and personal credit are separate, right? The answer is complicated. If your business is a sole proprietorship or just starting out, there is a good chance that lenders will check both your business and personal credit scores.
Further muddying the waters, if your personal score is good but your business score is poor or nonexistent, you may be asked to sign a personal guarantee for credit. If so, your personal score will absolutely make a difference in your business's ability to get funding from a bank or a line of credit.
In these cases, cleaning up your personal credit, such as taking steps to pay down debt, may help your business. Completely paying off your debt may not be your best bet, but improving your score certainly can't hurt. If you think your score might be low, get a copy of your personal credit report and work on building better credit.
You might also want to get a copy of your business credit report to see where your business stands or verify that your business even has a credit score. These reports aren't free like a personal report can be, but it's worth it to know your score and how it could improve.
What is considered a good business credit score?
Unlike a personal credit score, which is based on a 300-to-850 scale, business credit scores are usually scored from 0 to 100. The closer your credit score is to zero, the riskier you will appear to financial companies, banks and investors. A credit score of 75 is generally considered excellent.
Factors that affect a business credit score
The three major business credit bureaus – Dun & Bradstreet, Equifax, and Experian – each have their own methods and criteria for determining your credit score.
Dun & Bradstreet business credit scores
Dun & Bradstreet measures your business's risk using a Paydex score, which ranges from 0 to 100. Your Paydex score is based on your payment data, which is either reported to the bureau directly or through partnering data collection companies. To raise your Paydex score, repay any loans or debts on time – or, better yet, ahead of schedule – and encourage your vendors or suppliers to report any positive payment history.
Dun & Bradstreet also calculates two other scores: your commercial credit score and your financial stress score. Your commercial credit score, also known as your delinquency score, ranges from 101 to 670 and assesses the likelihood of a delinquent payment within the next year. Your financial stress score, ranging from 1,001 to 1,610, assesses the likelihood of business failure within the next year. In both cases, a higher score suggests lower risk.
Equifax business credit scores
Equifax provides three different credit assessments for businesses: your payment index, your credit risk score and your business failure score. The payment index, measured on a scale of 1 to 100, is based on payment history data from both vendors and collectors, and on-time payments will improve this score. However, this score doesn't predict future behavior.
Assessment of future risk comes from your credit risk and business failure scores. (For both of these, a score of zero indicates bankruptcy.) The credit risk score, which typically ranges from 101 to 992, measures the likelihood of your business making delinquent payments. To determine this number, Equifax looks at the size of your company, available credit limit, the age of your oldest financial account and evidence of any nonfinancial transactions (such as invoices) being delinquent or charged off for two or more billing cycles.
The business failure score, ranging from 1,000 to 1,610, assesses how likely your business is to fail within a year's time. This is based on the length of time since your oldest financial account opened, the percentage of your credit limit you've utilized over the last three months, evidence of any nonfinancial transactions being delinquent or charged off for two or more billing cycles, and any late or delinquent payments or accounts in the previous 24 months.
Experian business credit score
Experian's credit score report includes your business credit score (ranging from 0 to 100) as well as information on payment trends, account histories and public records. Checking these records regularly can help you find areas in which you can improve your credit score.
In addition to payment history, Experian accounts for several factors when determining your business credit score: credit information from your suppliers and lenders, legal filings, and any information from public records or collections agencies. The bureau also factors in your credit history, the age and size of your business, and whether you have liens, judgments or bankruptcies against you. Generally speaking, small businesses will be assigned a higher level of risk than larger, more established companies.
Strategies to improve your business credit score
If your business does have a credit rating but it needs cleaning up, there are some easy ways you can take care of that.
1. Monitor your credit report.
As with your personal credit report, you should monitor your business report regularly. Errors can happen, and you should work to clear those up as soon as you discover them. The lower interest rate you get from a good score will more than offset the cost of acquiring your credit report.
2. Establish credit accounts with vendors.
Make sure you're working with vendors that report payments. You may have a perfect payment record with a local supplier, but if they don't report your payment history to the credit bureaus, it won't help your rating. Ask any of your vendors that you have established payment terms with if they report. If not, consider adding vendors to your roster that do.
3. Pay vendors early.
Once you have established payment terms with vendors that will report your payments, make sure you pay them on time. Better yet, pay them early. Dun & Bradstreet's widely used business credit scoring system, from 1 to 100, is based on your payment history. Paying on time gets you a decent score, but paying early is the only way to get anywhere near 100.
4. Decrease your credit utilization ratio.
You should also concentrate on keeping your debt ratio low. The amount you owe versus the amount of credit you can use impacts your score. Paying down your debt is good, but in lieu of that, consider opening another line of credit. Although it might seem counterintuitive, it can help your business's credit score.
5. Dispute errors and inquiries.
Carefully and regularly review your credit report for any mistakes. Hard inquiries and unpaid debts can have a significant impact on your business credit – most debts will stay on your report for seven to 10 years after your last payment. So, if you see anything that shouldn't be there, contact your credit card company or credit reporting agency immediately. You have the right to dispute any charges or inquiries that cannot be substantiated, and any inaccurate information must be investigated and removed.
While removing false information from your report can boost your business credit score, don't expect it to happen overnight. Credit bureaus must investigate any disputes within 30 days of receipt, with an additional 15 days allowed if more information is provided later. If your dispute leads to a change in information in your credit report, allow an additional 30 to 45 days for this to be reflected in your score.
Keeping a paper trail of your communications, as well as keeping track of your timeline and following up with the bureaus as necessary, can help you get the results you need from your dispute in a timely manner.
6. Build your credit history.
If you haven't established credit with vendors or gotten a business credit card yet, start on that now, even if you need to personally secure the loan or line early on. The more of a credit history you can establish for your business, the less your personal finances will affect your business's ability to get financing.
Dawn Kuczwara contributed to the writing and reporting in this article.