What is a Business Credit Score and How Important is it?

*This piece appeared on our blog two years ago and has been adapted for the current events.*

The past four months have proven to be exceedingly challenging for private citizens and businesses alike. When the pandemic started, many of us held out hope that it would be short-lived. The economic stimulus checks and SBA loans helped tide some people over but only temporarily. As the months have dragged on...many businesses have had to shutter their doors and close up shop, whether temporarily or permanently. If you're a business owner, have you thought about how your business credit score is faring throughout all of this?

What is a business credit score?

It’s the key to your business’s financial success. If you’re familiar with a personal credit score, such as a FICO credit score, it’s similar to this. In most cases, it’s a number between 1 and 100 that represents your business’s creditworthiness. Your score tells institutions whether or not they should lend your business money and how much they should be lending. They can also discern how likely you are to repay them in a timely fashion. A higher number on your credit score represents a strong history of taking out loans and repaying them on time.

Why do I need a business credit score?

Most likely, if you’ve just started a business, you’re using your personal credit to get the ball rolling. Using your personal credit indefinitely may not be the best decision for your business. Here are a few examples as to why establishing a business credit score is beneficial:

• Easier to obtain financing: If you are able to establish a business credit score, it will easier to obtain a loan or line of credit in the future.
• Potentially lower insurance policy rates: Insurance rates will rise as your business flourishes, but with a superb business credit score, these rates may be lower.
• Separation of business and personal finances: By creating a credit profile for your business, you’ve added a degree of separation between personal and business finances. This makes it easier to track expenses for the purpose of taxes. Also, you won’t have to worry about personal finances, expenses, and debts intermingling with business finances.
• Increased borrowing power: Larger amounts of financing may be easier to get if you have a decent business credit profile.

Establishing and growing business credit can reap remarkable benefits and financial advantages for a company. With a notable credit profile, businesses have a better chance at leasing equipment, securing lines of credit, obtaining a company vehicle, and getting a business credit card or loan without compromising personal credit.

Finally, it’s important that you know exactly what affects your credit score.

• Payment history: Likely the most obvious factor, it’s crucial that you make payments on time and for the correct amounts. A string of late or missed payments will result in a lower credit score.
• Length of credit history: A well-established line of credit is going to create the best credit score. Even if you have a history of a few missed or late payments, this is better than a short or nonexistent credit history.
• Company size: Though this may vary, some lenders prefer not to lend to businesses of a certain size.
• Credit utilization ratio: If you max out on all lines of credit every month, this will send a signal to lenders. Essentially, you want to be aware of how much you owe on current credit lines in relation to their limits.
• Risk Factors: Some businesses possess risks simply based on their industry. For example, a business located in a town with a low population density may be considered high risk in comparison to a business in a highly populated location.
• Public Records: Filing for bankruptcy or a history of civil judgments or tax liens against a business have proven detrimental. Since these are public, anyone can view this information.

Like many financial matters, credit scores are constantly changing, some of which is in your control and some is not. By focusing on what you can control and knowing what you can’t, you will be a more effective business owner. A commitment to striving for a great credit score will provide opportunities for improved financing, increased cash flow, and better business breaks.