Be Vigilant About Your Business Credit Score
Hey, what’s the score? We mean your business credit score. It can either help or hinder you as you apply for loans or shop for the things you need to keep your company competitive.
As an individual, you’ve no doubt been urged to regularlycheck your credit score. Most people nowadays know that, with a subpar personalcredit score, they’ll have trouble buying a home or car, or just getting areasonable-rate credit card.
But how about your business credit score? It’simportant for much the same reason — you’ll have difficulty obtaining financingor procuring the assets you need to operate competitively without a solidscore. So, you’ve got to be vigilant about it.
Algorithms and data
Business credit scores come from various reporting agencies,such as Experian, Equifax and Dun & Bradstreet. Each agency has its ownalgorithm for calculating credit scores. Like personal credit scores, higherbusiness credit scores equate with lower risk (and vice versa).
Credit agencies track your business by its employeridentification number (EIN). They compile data from your EIN, including thecompany’s address, phone number, owners’ names and industry classificationcode. Agencies may also search the Internet and public records forbankruptcies, judgments and tax liens. Suppliers, landlords, leasing companiesand other creditors may also report payment experiences with the company tocredit agencies.
Timely bill payment is the biggest factor affecting yourbusiness credit score. But other important ones include:
Level ofsuccess. Higher net worth or annualrevenues generally increase your credit score.
Structure. Corporations and limited liability companiestend to receive higher scores than sole proprietorships and partnershipsbecause these entities’ financial identities are separate from those of theirowners.
Industry. Some agencies keep track of the percentage ofcompanies under the company’s industry classification code that have filed forbankruptcy. Participation in high-risk industries tends to lower a businesscredit score.
Track record. Credit agencies also look at the length andfrequency of your company’s credit history. Once you establish credit, yourbusiness should periodically borrow additional money and then repay it on timeto avoid the risk of being downgraded.
Business credit scores help lenders decide whether toapprove your loan request, as well as the loan’s interest rate, duration andother terms. Unfortunately, some small businesses and start-ups may have littleto no credit history.
Build your company’s credit history by applying for acompany credit card and paying the balance off each month. Also put utilitiesand leases in your company’s name, so the business is on the radar of thecredit reporting agencies.
Sometimes, credit agencies base their ratings on incomplete,false or outdated information. Monitor your credit score regularly and note anydowngrades. In some cases, the agency may be willing to change your score ifyou contact them and successfully prove that a rating is inaccurate.
Maintaining a healthy business credit score should play acentral role in how you manage your company’s finances. Contact us for help inusing credit to help maintain your cash flow and build the bottom line.