Business Credit Score Basics

You’re ready to start a business. You’ve done your research, identified demand, and you have the right experience. There’s just one problem. You need money, and you need access to business credit. 

That’s great; because financial institutions and suppliers want to lend your business money, and provide you with goods and supplies on credit. it’s their bread and butter. But they need to know that they can trust you, and they don’t have the time and or resources to conduct a deep dive into your finances and business history to figure out. 

This is where your business credit score comes in. Your business credit score is a number that tells everyone else how creditworthy you are. The better your score is, the easier it will be to access the financing, supplies, and inventory, that your business needs to flourish and grow.


Business credit reporting bureaus 

The three main business credit reporting bureaus in the U.S. are Equifax, Experian, and Dun & Bradstreet. They calculate your business score using models that are somewhat different in what information they consider, and how that data is weighted, but are much the same in function and principle in that they obtain and use data regarding your business and its ongoing operations from business from thousands of sources, and the use hundreds of variables to determine what information regarding your business will make you either more or less of a credit risk. 

What data will be analyzed and affect your score? 

  • Information regarding your transaction and payment habits. This information is reported to them by lenders, vendors, and other companies you do business with, and includes both positive and negative information and trends over time.
  • Information from public records. This includes whether you have a mortgage or liens that can lower the value of your assets and whether there are court judgments against your business. Mortgages, liens, and court judgments against your business will be recorded at your county clerk’s office, or in court records, which are constantly swept for information that will be fed into the algorithm to lower your score. 
  • Demographic Information. This includes information regarding the size of your business, how long it has been operating, and whether the trends in your industry are raising or falling in terms of demand and profitability under current market conditions. Note that these are not things that you are in control of or influenced by your ability and success in running your business. However, they can affect how your risk level nonetheless in terms of your ability to meet your obligations as they come due, and thus will be used to adjust your score. 


How to establish and grow your business credit score  

  • Register your business. Establishing a business entity such as a Limited Liability Company (LLC), is the first step to differentiating you as a person and your business. Sole proprietors can use their social security number (SSN). 
  • Open a separate business account and start applying for lines of credit. The interest rates will be much higher at the beginning, but if you use them continuously and conservatively, it will reinforce the fact that you are an active business which the algorithms will use to build up your ratings, after which your score will improve over time.
  • Establish modest lines of credit for vendors for small items like office supplies. Regardless of the low sums involved, the volume of these transactions will go a long way in raising your score.    
  • Apply for an employer identification number (EIN). While this is not required for you to establish a business credit score, some lenders will not report to credit bureaus any transactions conducted with businesses that do not have an EIN. As we will discuss later, one of the ways you can raise your score, thus nonreported transactions are missed opportunities. Obtaining an EIN is a free and uncomplicated process that you can do on the IRS website so it’s advisable to get one right at the start. (And by the way, in case you were wondering, you do not need to have any employees in order to obtain an EIN).   
  • Register for a Dun & Bradstreet D.U.N.S. number. Also not required, but certain financial institutions and potential lenders will only do business with other businesses that have a D.U.N.S. number. It’s also free.


How to keep improving your score. 

As we mentioned above, each business credit reporting bureau considers different factors and assigns them different weight. Given that amongst all your creditors and suppliers, it is almost certain that each one of the scores is exclusively used by some of your creditors, and others will use all three to arrive at a blended score. Therefore, all of these factors are important, even if some of them are not considered, or given less weight, by one bureau or the other. Let’s get the obvious ones out of the way first. 

  • Pay your bills on time. This one is the most obvious, so let’s not waste any time here. Moving on.   
  • Always keep your personal and business accounts and expenses separate.  A few late or missed payments can lower your score for a long time. Even one of those can remain on your credit report for 36 months, and you want to avoid that as much as possible. 
  • Keep your debt utilization ratios low. Now we’re getting to the interesting stuff. Your debt utilization ratio refers to the percentage of credit you already accessed against all lines of credit available to you. For example, if you have two lines of credit, each with a $50,000 limit on each. If you’ve accessed $25,000 on each of those lines, your credit utilization ratio would be 50 percent. A high debt utilization ration will raise your score because it demonstrates that your business is running smoothly without the need to consistently take on more debt, that you’re managing your finances and business operations responsibly, and are not overextended.  
  • Avoid secured loans. Just like secured personal loans, secured business loans will be cheaper than non-secured ones. Therefore, it makes sense that—to the extent that you’re %100 confident in your ability to make every payment on time, and therefore never have the lien exercised against your business’s assets—you should always go for the secured option.  Using your business’s assets as security for a loan will diminish their value, and hence the value of your company—which is one of the factors used by the algorithms to raise or lower your score. This is not to say you should never take out a secured loan, but rather something to consider as a variable when weighing the pros and cons of a secured vs unsecured loan. 
  • Try to only use vendors that report their transactions to one or all of the business credit bureaus. Remember, one of the major factors used by the algorithms to determine whether you are a real business is that it is operating consistently, and this can be reinforced if they see as much business activity as possible. They are not only considering whether everything was paid on time. but also the overall number of them. Thus the more transactions reported to them by the businesses you work, with the better.  

In short, take every effort to manage credit and debt levels. Don’t incur liabilities unless absolutely necessary for your business’s survival. Learn to innovate; to do more with less, and over time your score will improve. Then you will have easier access to credit at lower rates, and positive cash flows that can weather industry downturns, and ultimately poised to expand and grow until you achieve world domination.

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