The business credit score is one of the most important metrics that may weigh heavily on your financial decisions.
The small business credit score has a similar concept to your personal credit score. It indicates a business’s creditworthiness in terms of the risk posed to a lender or another entity that it conducts business with.
A business credit score works by providing lenders and other parties with a transparent measure of a company’s financial reliability, which can influence financial decisions, lending eligibility, and business transactions.
Unlike personal credit scores, business credit scores are publicly available and can be accessed by anyone interested in evaluating a business.
Business credit scores are also usually rated 0-100, in comparison to personal credit scores of 300-850. Business credit scores do not fall within the same numerical range as personal credit scores, as they typically operate on different scales depending on the credit bureau or scoring system.
But how does the credit score work for a small business
It’s influenced by a number of parameters. Multiple factors, such as payment history, company age, industry type, and debt usage, all play a role in determining the score. But generally, a company that has no problem keeping up with debt repayments would have a higher credit score.
Lenders may check both business and personal credit when evaluating a loan application. In many cases, assessments consider data from both the business and its owner to provide a comprehensive view of credit risk.
And there’s a lot more to it. So, let’s dig a little deeper.
Business Credit Score – Complete Breakdown
At the most basic, this credit score—also known as the company credit score—shows if your company is eligible for a loan. It could also determine if you’re likely to be a good business customer.
Also known as the commercial credit score, it takes into account the following parameters:
- Business credit obligations
- Payment history (involving both suppliers and lenders)
- Legal filings (including bankruptcy, judgements, and tax liens)
- Years in operation
- Company size and type
- Repayment history compared to similar businesses
- Risk factors
- Company’s credit history
Credit reference agencies collect credit information such as legal records, payment history, and demographic details. A business credit score is calculated (business credit score calculated) by credit reporting agencies using various data sources.
Now, this is best illustrated with a real-life example.
Let’s say you want to finance new equipment purchases. In this case, the lender will consider your credit score among other criteria, such as:
- Revenue
- Liabilities
- Assets
- Profits
- Total equipment value (for the equipment loan)
A credit bureau collects and reports business credit information. Credit reference agencies play a key role in assessing business credit scores, influencing lenders’ risk evaluations. Additionally, credit applications and each credit search can impact your business credit score, so it’s important to manage them carefully.
For small business owners, the business credit score check might also take into account personal circumstances. It’s because your professional and personal finance could intertwine. This is why lenders are likely to check your personal credit score as well. Maintaining a good credit record is important for both personal and business credit.
The silver lining is that this check is no big deal if you’re not in any legal trouble. On the business side, make sure to get rid of outstanding debt and have enough reserve to cover overhead expenses.
A credit reporting agency can provide official business credit reports, which are used by lenders to assess your company’s creditworthiness.
Understanding Business Credit Reports
A business credit report is a comprehensive record that details your company’s credit history, payment performance, and overall financial information. Compiled by credit reporting agencies, this report is a key tool used by lenders, suppliers, and other stakeholders to evaluate your business’s creditworthiness and determine your eligibility for business loans, business credit cards, and other financial products. A good business credit score, which is calculated based on the data in your business credit report, can open doors to better financing options, stronger vendor relationships, and more favorable loan terms.
Your business credit report includes several important elements that influence your business credit score. Payment history is one of the most critical factors—consistently paying business bills and invoices on time demonstrates reliability and can help you build a healthy business credit score. Credit utilization, or the ratio of credit used to credit available, also plays a significant role. Keeping your credit utilization low signals to lenders and credit card companies that your business manages debt responsibly.
Public records, such as tax liens, judgments, and bankruptcies, are also included in your business credit report. These records can have a substantial impact on your business credit score, as they indicate potential financial or legal trouble. Additionally, industry risk is considered; businesses operating in industries deemed high risk may face more scrutiny or higher interest rates when applying for a business loan.
Credit reporting agencies like Dun & Bradstreet, Experian, and Equifax gather information from a variety of sources, including public records, credit card companies, and other lenders, to compile your business credit report. They analyze this data to generate your business credit risk score, which helps other lenders and business partners assess the likelihood of your company defaulting on its obligations. The business credit scores range from 0 to 100, with a higher score indicating lower risk.
For small business owners, it’s essential to regularly review your business credit report to ensure all information is accurate and up-to-date. Errors or outdated information can negatively affect your business credit score and make it harder to access finance or negotiate favorable terms with suppliers. By monitoring your credit report, you can quickly address any discrepancies and maintain a strong credit rating.
Other factors that can affect your business credit score include your company’s cash flow, overall financial information, and the business credit risk score assigned by reporting agencies. Strong cash flow and positive financial data can improve your creditworthiness, while a history of late payments or high credit utilization can lower your score.
Understanding how your business credit report works—and what factors affect your business credit score—empowers you to take control of your company’s financial health. Make it a habit to pay bills early, manage debt wisely, and keep your credit report accurate. By doing so, you’ll not only improve your business credit score but also increase your chances of securing business loans, building trust with vendors, and achieving long-term business success.
Finally, it’s crucial to keep your personal and business finances separate. Mixing personal credit with business credit can put both your personal credit score and your business’s financial health at risk. Use business credit cards and business loans for company expenses, and avoid using personal credit for business purposes. This separation protects your personal credit and ensures your business credit file accurately reflects your company’s financial status.
In summary, a well-maintained business credit report and a healthy business credit score are vital assets for small business owners. By staying proactive with credit reporting, managing your business finances responsibly, and keeping personal and business credit separate, you’ll be well-positioned to access finance, grow your business, and build a strong foundation for future success.
How to Take Advantage of the Business Credit Score
Aside from applying for a loan, a good credit score gives you a range of options, including:
- Better terms with vendors – companies with a high business credit score may be eligible to pay in instalments or qualify for a net 60 payment term, just for a start. The higher the credit score, the more likely it is for suppliers to extend generous terms.
- Better insurance rates – your company’s creditworthiness may result in better deals when buying business insurance. It’s because an insurance agency may also look at your overall financial history, where the business credit score is likely to feature prominently in any scoring system.
- Investor appeal – if you have any aspiration for getting funding from venture capitalists and angel investors, having a high credit score and a strong business credit rating could be invaluable.
Lenders and business partners often view companies with high credit scores as low risk, making them more likely to offer favorable lending terms and business opportunities.
Furthermore, qualifying for better loan terms can be crucial for your company’s cash flow. A strong credit score also reflects positively on your company’s financial health, supporting long-term stability and growth.
With a high score, your company should be more attractive to business partners and vendors. In turn, that will help your business remain competitive and thrive.
Maintaining a strong credit score is essential for your business’s financial health, ensuring access to better funding opportunities and supporting long-term success.
Getting Your Business Credit Report and Score
You can get your company’s business credit score from a reporting agency, such as Experian, Dun & Bradstreet, or Equifax, which are tasked with keeping these scores.
Conducting a company credit check is important to assess your business’s financial health and creditworthiness, which can impact your access to finance, supplier agreements, and partnerships.
As mentioned, most agencies use a range of 0 to 100. But some may keep up to three numbers for different areas of your business’s financial position.
A business credit score of 100 may only be achievable for businesses that pay expenses in advance (usually 30 days). The score may drop to about 80 for businesses that pay on time. Needless to say, it will head south for companies that are late with paying creditors.
If an agency keeps a set of numbers, one of them could be a business failure score, which indicates the likelihood of your business failing. Think of it as a future risk assessment with a score ranging from 1,000 to 1,880.
Reporting agencies use a variety of data sources to assess your business’s creditworthiness, including public records, trade payment data, and marketing databases that provide background information and demographic insights.
Using Your Business Credit Score
When a vendor considers doing business with your company, how do they know if you’re going to pay on time?
They’ll check your credit score, of course, often by performing credit checks to assess your creditworthiness. And if it’s high enough, the vendor will take you on and might even offer favourable terms.
Like the personal credit score, business credit scoring is an ongoing process.
You can subscribe to credit score reports for your company and review them continuously to be sure that everything is on the up and up. To maintain a good score, always pay invoices promptly, as timely payments help improve your credit standing.
If your business credit score was to drop all of a sudden, as a business owner you’d want to take care of it as soon as possible. Preferably before the companies that you do business with find out and want to renegotiate deals to lower the risk on their end.
Aim for the Highest Score
How does the credit score work for a small business?
Basically, the system assigns a numerical value to the overall financial health of your business and calls it its business credit score. The score shows if your company is a good potential customer for other businesses and lenders.
All business owners should keep an eye on the credit score. If it gets too low, it’s an indicator that something might be amiss with your cash flow or liabilities. Managing your personal finances is also important, as a strong personal credit rating can help you borrow money if your business credit score is low. Additionally, paying bills—including utility bills—on time is crucial for maintaining a good credit score.
Are you ready to take the next step? Unsecured Finance Australia can help you with business loans that you can use for virtually any purpose, including improving your business credit score. Click here for more information.
Finally, make sure your business information is always up to date with Companies House, as this supports your credit score and demonstrates your company’s reliability.
