BUSINESS CREDIT

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Why Do I Need a Business Credit Score?

If you are running a business, you can’t get by on your personal credit alone (unless you are a newbie business owner, then it’s on you). Would-be lenders, vendors and customers will be looking at the financial health of your business, so they’ll be assessing your business credit, the good, the bad and, dare we say, the ugly. 

Qualify For Business Loans

Banks will use such scores, as one of many factors, to give either a thumbs up or thumbs down on making you a loan. They, of course, could also look at what goes into the score itself, including the content of the business credit reports such as extreme payment delinquencies, collections, tax liens, bankruptcies, and judgments.  

Obtain Trade Credit

With a high business credit score, you can get good terms from your suppliers and vendors to buy on credit. A good score could snare your business a big, fat line of credit, with payment due weeks after you make the purchase. A lousy score may doom your business to paying your vendor cash on delivery, or it could force you to personally guarantee the purchases your business makes. 

Create More Business Opportunities

If you have your heart set on dealing with Big Business or the government, you can bet on the fact that they may look up your business credit score and require you to have a minimum score. Look at it this way: Say you want to sell to Walmart. It will probably require a good credit score, at a minimum, before it does business with you. And if you don’t keep that score healthy, you may be asked to clean up your act or be dropped.

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Does Personal Credit Score Matter For Business?

Usually, business and personal credit scores are separate from each other, and are typically calculated in different ways. But if you are a small-business owner, your personal credit profile can affect your business, and this is how:


Small Businesses

Often, an owner and his/her small business, especially a new one, are nearly one and the same.The business has little or no financial track record beyond its owner’s. And if you as the owner don’t have a relationship with the bank you want money from, the bank will check out your personal finances before deciding if you and your business are worth taking a financial chance on.


Sole Proprietorship

Here it gets even more up close and personal. As a sole proprietor, there’s scant financial daylight between you and your business. Therefore, take good care of your personal credit score because it will be your business’s. A lender will look at your personal credit score in deciding whether to lend. And watch out — you will be personally liable for your business’s debt.


Partnership

Your personal credit score will count, but in some forms of this business, partners will be responsible for only a certain part of the financial obligations.


Limited Companies

A limited company may have a distinct corporate identity and its shareholders are shielded from liability, but lenders could still ask for the personal credit details of its directors and the business owner.

The Bottom Line

It all boils down to this: If you are a small-business owner, your personal credit profile is closely intertwined with that of your business. Do you want that term loan or a short-term loan? You can be sure that a potential lender will pull a copy of your personal credit report.

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Common Questions

What is business credit score?

A business credit score is a numerical snapshot of your business’s creditworthiness. In other words, the score is a barometer of a risk of skipping out on paying bills and other monetary obligations in the next year. For financing, business credit lines and bank loans, and trade credit from vendors, your business’s credit score is key.

Say you’re a small-business owner and you need a little help from vendors in the form of a trade credit. If you have a good business credit score, you could work out a deal in which you don’t pay a penny up-front for goods, and when the goods land on your doorstep, you get a trade credit for, say, 90 days. That means you don’t have to pay up for three months.

How business credit is used?

Business credit, like personal credit, is your business’s capacity to borrow money as well as buy on credit (i.e., a buy now/pay later option). Business credit reports have detailed data about your business’s financial history, including payment history, court filings and other indications of how well your business sticks with its obligations. Before they greenlight financing, lenders, vendors and other potential creditors check your business credit report to assess how your business behaves financially.

Business credit scores are snapshots of your business’s creditworthiness and are key to your business getting the OK for financing and trade credit, as well as favorable loan and insurance rates. Credit bureaus assign scores. A good score tells creditors that your business is financially trustworthy, thereby improving the odds of your business getting money.

In short, credit scores are used to do the following:

● Determine your business’s borrowing power. 
● Determine business insurance rates.
● Determine payment terms your business can get from vendors and suppliers.

How are business credit scores calculated at different agencies?

Each credit reporting bureaus has its own way of coming up with a business credit score. Here are the differences.


Dun & Bradstreet

This bureau uses information on how your business has paid its bills, aka past payment performance, to devise your business’s score. Called the PAYDEX score, it starts at zero (bad, bad) and ends at 100 (excellent).


Experian

This bureau doesn’t stop at one credit score. Instead, it has three: payment index, the credit risk score and the business failure score.

The payment index, from zero to 100, indicates your business’s payment history, and is derived from assessing your payment record with vendors and creditors.

The business credit score, from 101 to 992, measures your business’s risk of delinquency and is derived from the bureau looking at the size your business, available credit, age of financial accounts and payment history to vendors.

The business failure score, from 1,000 to 1,610, indicates the risk of your business shutting its doors in the next year. The lower the score, the greater the risk (e.g., zero means you are bankrupt). The bureau looks at how old your oldest financial account is.


Equifax

This bureau assigns a business a business credit score and, like PAYDEX, it goes from zero (bad) to 100 (excellent). Equifax, however, looks at way more than your business’s payment track record; it sifts through data on your business’s credit history with vendors and lenders, court filings, how big your business is and how long it’s been around, and information found in public records and collection agencies (liens, judgments, bankruptcies and the like).


FICO

This service produces the Small Business Scoring Service, or SBSS, score. Scores are from zero to 300, and most lenders require a minimum score of 160 for a business to be in the running for financing. It weighs a variety of factors, such as personal and business credit history, how long your business has existed, how many employees it has, its revenues and assets.

Banks and other lenders can use different approaches in coming up with an SBSS model, like emphasizing some factors and minimizing others.

How often do business credit scores change?

Does a business credit score change hourly, daily, monthly, too often?

The answer is simple. Your credit score changes when new information appears on your business credit report.

Business credit reports have data reported by creditors, including credit card companies, vendors, banks, to name a few. Most creditors voluntarily update credit reporting agencies every month. Remember, though: vendors, creditors and the like are not required to supply information for such agencies for business credit reports.

The business credit score changes depending the story the data tell, data that includes things like payment history, outstanding debt, company size, company age, and industry type (and mostly, industry risk). Let’s say your business has had a sterling on-time payment history; then, one year, your business starts to tank and you have a string of late payments. If reported to the credit bureau, your credit score could change (probably downward) in a matter of weeks.

What can hurt your business credit?

You’ve worked hard to start and build your business, but always remember this: A key to business success is protecting your good business credit. Business credit, however, doesn’t take care of itself. You as an owner must be extra-careful to avoid doing things that will hurt it.

Here are the most important items on your never-do-this list:

Do not ignore red flags in your business credit report. Check your credit reports monthly to see that they do not have errors. Errors can sink a good credit rating.

Do not miss payments or pay late. A key component of your business credit score is your payment history. If you pay late or skip payments, this information will lower your credit score.

Do not max out your credit cards. Doing this will up your credit-use ratio and this is not a good thing for your credit rating. Why? Credit agencies expect a business should use only 30 percent of its credit card limits. Use more and banks may think your business is in a financial mess.

Do not let your credit cards gather dust. Use your credit cards because this will establish a credit history that, in turn, will build your credit score. And see that at least one transaction is reported to credit reporting agencies, showing that you pay on time.

Do not close old credit accounts. Canceling old credit cards could lower your business credit score. Eliminating them would also eliminate the history of good credit that had helped build your business’s good credit score.

Do not open new credit accounts too often. Don’t be too eager. Opening too many accounts in no time flat will ding your credit rating because it will lower the average account age (not good) and many inquiries will be made about these newbie accounts (also not good).

What can help your business credit?

Say your business credit track record is not the best and your score is in the proverbial basement. What can you do to jack up that score and make it good to stellar?

Here are a few pointers:
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Start making your payments on time. Your business’s payment habits and history are major factors in the health of your credit. Over time, paying bills on time will show that your business pays its debts. On-time payment will improve your score and tells lenders, vendors and suppliers that your business is a good bet.

Keep your debt-to-income ratio in check. The more your business is knee-deep in debt, the less disposable income your business has. If that debt inches close to or surpasses your businesses income, then your business will be seen as high risk. So, watch out for your business’s debts, don’t let them get out of hand, and then faithfully pay them down so your income-debt ratio won’t get out of whack.

Use your credit. Opening and using business credit accounts can help you extend available credit and up that credit score.

Keep a healthy personal credit profile. Credit bureaus may look at your personal credit score, even if you keep your personal and business finances separate (remember the Intelliscore Plus score? It gets personal). So, stay current with your personal bills, avoid unnecessary credit inquiries and don’t use your personal credit for business needs.

Review your credit reports. Keep on top of your personal and business credit reports. That way, you can catch possible trouble spots and stay knowledgeable about what’s in that credit profile.