What Is a Business Credit Score?

Small Business
You can trust that we maintain strict editorial integrity in our writing and assessments; however, we receive compensation when you click on links to products from our partners and get approved. Here's how we make money.
shutterstock_129162362

Owning a small business is a big responsibility, and it’s certainly never boring. Between inventory, payroll and bookkeeping you’re probably swamped!

This is why many entrepreneurs neglect to think about establishing a credit score for their business. After all, why worry about one more thing? But knowing what a business credit score is and how to set one up is a smart move. If you’re not sure where to start, take a look at the details below.

The basics of business credit scores

Like a personal FICO score, your business credit score is a numeric representation of creditworthiness. The information on your business credit report is used to produce the score, and prospective business lenders use it to predict how likely it is that they’ll be repaid in a timely fashion. A higher score means that your business is considered a low risk.

Speaking of high scores, business credit is rated on a scale. The most commonly used business credit score is the Paydex score, produced by Dun & Bradstreet. The Paydex score range is 0 to 100, with 100 being the highest. You should aim to have a Paydex score of at least 75.

Another commonality between business and personal credit scores is the data point that’s most important in creating a high score: your track record with paying your bills on time. Making on-time payments to creditors is the best thing you can do build a good business credit score.

Unlike a personal credit score, there is no one, dominant model for generating a business credit score. There are three major business credit reporting bureaus: Dun & Bradstreet, Equifax and Experian. Unfortunately, each uses its own scoring algorithm. Aside from making on-time payments, it can be challenging to figure out exactly what you should do to boost your business’s score.

Why is it a good idea to establish a separate score for your business?

If your business is just getting off the ground, you’re probably using your personal credit to do the borrowing. If things are going smoothly, you might be wondering why it’s necessary to establish separate credit for your business.

But there are a lot of good reasons to separate your personal and business credit:

  • Getting financing will be easier – Not all business lenders allow you to apply for credit with your personal score. To ensure that your company will have every financing opportunity out there, establishing a solid business credit score is key.
  • You’ll be able to obtain bigger loans – Relying on your personal credit will limit the size of the loan you’ll be able to obtain – after all, a person only needs so much credit. But lenders expect businesses to need big loans, so being able to borrow in your company’s name is essential.
  • Rates on insurance policies could be lower – As your business grows, insuring it could get expensive. A high business credit score will help keep rates lower.
  • Your personal finances won’t be at risk – Creating a credit profile for your business adds an additional layer of separation between your business and your personal finances. This is important for protecting both entities in the event that one hits a rough patch.

Getting started with business credit

If you’re not sure how to get the ball rolling with establishing your business’s credit, follow the steps below:

  • Incorporate your business and get a tax EIN number – This will establish a legal identity for your business, which makes reporting to the business credit bureaus possible.
  • Get a DUNS number – This number is an identifier used by Dun & Bradstreet to create and maintain your business credit. You can use this number when applying for business credit, and to check your business credit report with the company.
  • Open a business checking account and credit card – Setting up separate accounts for your business makes it easier to get credit from lenders and suppliers. Plus, using your business credit card responsibly could help build your score.
  • Ask lenders and suppliers to report your accounts – When you get credit from a supplier or a bank, be sure that they’re reporting your payments to the business credit bureaus.
  • Keep your accounts in good standing – Paying your credit accounts on time and in full is incredibly important to building a good business credit score. Make it a priority!

The bottom line: Establishing credit in your company’s name will take time, but it’s worth taking the extra step. Use the information above to get started today!

Business loan application image via Shutterstock