Many small businesses turn to credit to expand, hire additional staff, or cover day-to-day expenses. A good credit score indicates that a company can make timely repayments and will improve its chances of approval. If a company’s credit score is poor, their application will most likely be declined or they will be charged with higher interest rates due to the risk of nonpayment.
A business credit score is not the same as a personal FICO credit score mainly because it is computed by business credit reporting agencies like Equifax Small Business, Experian Business, and Dun & Bradstreet. Instead of FICO’s 300 to 850 range, business credit can be graded from zero, the lowest, to 100, the highest. Business lenders require a minimum of 75.
Before we discuss the factors that affect a business credit computation, let’s talk about the importance of knowing your scores.
Your business credit score changes from time to time
Before you decide to apply for business credit, it is important to know the chances of getting approved. You may find yourself confident because you had a great score the last time you checked, but this changes every time your lenders or vendors report new information.
- Avoid information mix-up
- Sometimes, vendors and lenders may report inaccurate information and your credit will be confused with someone else’s. This is a nuisance that you must sort out as soon as possible to avoid conflicts once you need to apply for credit.
- Avoid fraud
- Consumers aren’t the only ones at risk of credit fraud, even businesses fall victim to these shenanigans which might lead to damages if not detected immediately. To avoid such scenarios, businesses are advised to review their credits regularly.
- Improve your chances to get better financing
- Business owners who manage their scores well display a strong understanding of their company’s finances. This, therefore, creates confidence in their potential lenders.
Factors that Affect a Business Credit Score
1. Public filings
Records on legal filings, bankruptcies, collections, and UCC filings are a major factor in a business’ credit score. Lenders rely on these records to know how you handle your financial obligations, so a stained record reflecting financial distress hurts a company’s credit score.
2. Years in business
Logically, not all businesses that have been around longer demonstrate a more credit-worthy record. What lenders ought to see is a track record that shows a well-managed business credit throughout the years, but consequently, not having a track record means there is nothing yet to base on.
If your business is new and you don’t have a business credit score yet, it is important to be mindful of your credit management by paying on time and applying for loans that you can settle as quickly as possible to build a good record.
Growth is a good sign that a business can handle its finances responsibly. Hence, creditors consider revenue a factor in assessing one’s capability to pay. To do so, business credit reporting agencies compare the company’s growth to the industry average and calculate the increase in revenue over time.
4. Business assets
To make it clear, not all business assets are qualified as collateral. High-value collaterals such as commercial real estate, heavy machinery, business equipment, and other valuable business assets that can easily be converted into cash in case the debtor fails to pay are the ones that count.
5. Credit inquiries
When applying for credit, you need to consider your chances of getting approval so you do not waste the inquiries done on your score. A credit inquiry reflects on your report for 2 years and affects your score for a year. Others advise you to worry less about this criterion as it does not have a permanent effect, but we believe that it’s better to pay attention to all the possible factors that might hurt your credit score just to be sure.
6. Credit history
Your overall credit history shows if you had late payments, credit extensions, if you were sent to collections, and other important details. This factor is used by almost, if not all business credit reporting agencies because it gives the lender a good view of the risk that they will be taking once they approve your application.
A good business credit score basically means you are potentially a low-risk debtor. It is your way of qualifying for better credit offers. Since there are multiple business credit reporting agencies, there is no standard method that is used by all. The best way to maintain a strong grade is to pay your debts on time, check your score every now and then, and consider all the possible factors that can affect your business credit score.