Understanding Your Business Credit Score

Getting Access to Capital at the Best Rates and Terms without Personal Guarantees

Did you know that your business credit score plays a vital role in the stability and growth of your company? It can positively (or negatively) effect your ability to secure financing, negotiate favorable terms on loans, and establish trust with partners and suppliers. Unfortunately, according to the 2015 Nav American Dream Gap Survey, 45% of small and medium business (SMB) owners surveyed did not know they have a business credit score, 72% did not know where to find their business credit score and 82% didn’t know how to interpret it.

Understanding your business credit score and how it is established, learning how to build your business credit score and knowing the resources and tools available to help you do this can be the key to unlocking access to business capital that can truly transform your small business.

What is Your Business Credit Score?

Much like your personal credit score, your business credit score is a numerical representation of your company’s creditworthiness. And much like a personal credit score, a business credit score assists lenders and suppliers in assessing the risk associated with extending credit to your business. But to understand your business credit score better, it’s essential to differentiate it from your personal credit score.

Your personal credit score ranges from 300 to 850, with the FICO? Score being the most common scoring model used. For personal credit scores, you likely know that a 700 or above is generally considered good with 800 or above being considered excellent.2 Business credit scoring doesn’t follow a single scoring model, but the most common scoring models use a business credit score that ranges from 0 to 100. On the scoring models that use this range, a business credit score of 80 or higher is considered a good business credit score.3 Getting to an 80 or better with your business credit score is an excellent business strategy that can open the door to acquiring credit, conserving cash flow, enabling growth and improving valuation. Unfortunately, building your business credit score is a little more difficult than it should be.

How is Your Business Credit Score Established?

Just like your personal credit score, which is built around your personal tax ID number, your Social Security Number (SSN), your business credit score is built around the Employer tax ID of your business, your Employer Identification Number (EIN). Also, like your personal credit score, which is established through personal tradelines that report to major consumer credit bureaus like Equifax, Experian, and TransUnion, your business credit score is established through business lenders and vendors that report to the major business credit bureaus. But unlike personal credit scoring, business credit scoring is highly unregulated and a lot more elusive to the individual business owner.

Your personal credit score is impacted by five factors: your payment history, the amount you owe (utilization), recent credit inquiries and credit mix. Business credit scoring is established differently. Simply put, your business credit score is a reflection of your businesses proof of ability to pay as reflected on the business credit bureaus. Did I say “simple”? Well, it sounds simple, but it’s definitely not.

Let’s unpack this statement...

Your business credit score is a reflection of your businesses proof of ability to pay as reflected on the business credit bureaus.

“Proof of ability to pay...”

How is your lender and supplier payment ability proven? Well, first, the lenders and vendors that extend you credit must report your payments to the business credit bureaus. However, reporting to the business credit bureaus is not as regulated as personal credit reporting. What you probably don’t know is that 98% of lenders and vendors do not report payments to the business credit bureaus.

Let me say that another way – less than 2% of the business lenders and vendors will report your payments to the business credit bureaus. To establish and grow your business credit score, using lenders and vendors that report is imperative. But knowing, or finding out, who those 2% that are reporting are is extremely difficult. A virtual needle in a haystack.

“As reflected on the business credit bureaus...”

Who are the business credit bureaus? There are several business credit bureaus in the marketplace, but there are 3 major business credit bureaus that reporting lenders and vendors report to: Dun & Bradstreet, Experian Business and Equifax Business. Reporting lenders and vendors don’t report to every business credit bureau. In fact, most reporting lenders and vendors typically report to only one or maybe two of the business credit bureaus. Why is this important?

Each of the business credit bureaus will have a separate business credit score for your business. Their score is based on the information that has been reported to them. This information can be very different between the credit bureaus, so it’s important to have good payment history reported to each of these three. Why?

Let me give you an illustration...

The owner of a business making 15 million annually goes to a bank and buys a helicopter for $5 million dollars all on the EIN of the business using his business credit. A few months later, he goes to a truck dealership to purchase a truck for the business (on the EIN), and he is denied. Why? Simple answer – the bank that he bought the helicopter through pulled his business credit report from one bureau and the truck dealership pulled from another. The scores were not the same – not at all.

This story illustrates the importance of building your business credit on all three of the major business credit bureaus utilizing a variety of reporting lenders and vendors in the different tiers of financing – the business credit tiers.

What are Business Credit Tiers?

It is also important to understand that there are 4 tiers of financing or “business credit tiers” that are available to business owners. Developing a strategy to use and move through each tier is important in order to reach an 80 plus credit score with each of the business credit bureaus. In a nutshell, Tier 1 begins with basic trade credit, Tier 2 includes advance trade credit with larger trade lines, Tier 3 includes bank lending and Tier 4 is where the real magic happens for business owners. Tier 4 moves outside of institutional lending to private investor funding and typically provides the best payment terms and the lowest interest rates. This is truly corporate credit.

Why Is It Important to Build Business Credit?

According to the 2015 Nav American Dream Gap Survey, reducing operating cost and planning for unforeseen expenses are major problems for small businesses, and two of the leading factors contributing to this are lack of growth and cash flow issues.1 Challenges like these can be addresses with access to capital. And by this, I mean business capital or funding that doesn’t utilize a business owner’s personal credit or require a personal guarantee. Your business credit score is the major determining factor for lenders and vendors that your company can be “trusted by the way it manages money.”5

Access to this capital can only happen when the businesses’ credit score is strong (80+) and Tier 4 credit has been built. Having a strong business credit score can provide access to funds when you need them that won’t put your personal savings and assets at risk. Relying on personal assets and personal credit should never be the answer.

It’s important to realize that your business credit score doesn’t improve over night, it takes time. But for you, the business owner, time is often your most prized commodity. So, spending the time to try and build business credit may not be the best use of your time. And let’s face it, finding a needle in a haystack by trying to find the 2% of lenders and vendors to use that are going to help build your business credit is a lesson in futility. This doesn’t diminish the need to do it, it just emphasizes the importance of using your resources wisely.

That’s where our team at Assurance Business Concepts comes in. We come alongside the business owners that are members in our program and work with them and for them to help them build their business credit score. We’ve done this for over 44K businesses, and we’re not stopping anytime soon. It’s not only our passion – it’s our mission.

Conclusion

Your business credit score is not just a number; it’s a vital asset that can significantly influence your company’s financial stability and growth. It can help reduce operating costs, plan for unforeseen expenses, and address cash flow issues, which are common challenges for small businesses. The time and effort required to build business credit is well worth it because it can provide your business with the financial stability and growth opportunities needed to thrive in today’s competitive business world. But you don’t have to do it alone. The J. Galt team is comprised of knowledgeable, experienced, passionate and trusted individuals that will guide you along the path to building business credit the right way in the fastest way possible.

Don’t underestimate the power of your business credit score, as it can be the key to unlocking financial success for your company. Building a robust business credit score across all 4 Tiers of business credit with all three major credit bureaus is an indispensable tool for obtaining business capital without relying on personal savings or personal guarantees. But it takes time. The best time to start was yesterday – the next best time to start is today.