An individual's credit score is widely recognized as having considerable influence on the ability to get a loan, rent a place to live and obtain insurance. Every business also has a credit score, and a business credit score possesses similar leverage.
"Business credit scores help creditors evaluate the risk in extending credit to a business, rather than an individual," explains Gerri Detwiler, head of market education for NAV, a South Jordan, Utah, business credit information provider.
What's in a Business Credit Score?
Credit reporting company Experian maintains credit files on 27 million small U.S. businesses, says Karim Chehade, director of product management and strategy for small business for the Costa Mesa, California, company. (Experian is one of four major providers of business credit reports and scores, along with Dun & Bradstreet, Equifax and FICO.)
Business credit files contain information supplied by lenders and suppliers about a business's performance in paying off loans and trade credit arrangements. They also have information from legal filings, collection agencies, credit card companies, corporate databases and public records.
—Karim Chehade, director of product management and strategy for small business, Experian
Like their owners' personal credit scores, these businesses' credit scores can affect their ability to obtain financing and interest rates and other terms of repayment on loans. Business credit scores can also affect the size of business insurance premiums. Anybody can check your business credit score, Chehade notes—suppliers, partners, government contractors and customers such as large retailers. Even competitors can look into your credit file for their own purposes.
Business credit scores range from 0 to 100. Similar to personal credit scores, a higher score is better. Personal credit scores use a different scale, however, and in other ways the scores are completely separate.
"Your business credit score has no impact on your personal credit score and vice versa," Chehade notes.
Several variables influence whether your business has a high or low credit score. They include the total outstanding balances on your trade credit and loan accounts, how many accounts you have and your payment habits. A score may be lowered if there are records of bankruptcies, judgments, liens and collection actions.
Scores also take into account any trends in your payment history. If you've been taking longer to pay bills recently, that may have a negative effect on your score.
Can You Improve Your Business Credit Score?
While almost any business is likely to have a credit score, you can make sure your credit history is being collected by requesting a nine-digit D-U-N-S number from Dun & Bradstreet. Your D-U-N-S number will set up a credit file and use the information to calculate your PAYDEX business credit score.
"It's important to know the D-U-N-S Number assigned to your business," says Amber Colley, small business expert with Dun & Bradstreet. Among other users, government contractors generally require bidders to have a D-U-N-S number.
Next, check your report to make sure it's accurate. You can obtain a business credit report from the major providers but, unlike personal credit scores, they are not required to provide them for free. Third-party providers such as NAV and Credit Karma may be sources for low-cost or free credit reports and scores on your business.
Once you have checked your credit report and ensured it's accurate, the next thing you may want to do is see that your credit transactions are being recorded. Not all businesses report to the business credit scoring companies. "Be sure to do business with lenders and vendors that report payment history to a credit reporting agency," says Chehade. "This can help build and improve a business credit profile by providing additional trade activity."
Finally, pay your bills on time. "Work with suppliers to invoice your company on terms and make sure that you pay your bills within those terms," says Colley. "A history of promptly paying bills can make a significant impact in how favorably your company is viewed."
If you do nothing else to check and improve your business credit report and score, seeing that you fulfill all financial obligations as agreed can help shine up the image prospective lenders and other businesses get from your credit file.
"With business credit scores, your payment history is the most important factor by far," Detwiler says.
The Future of Credit Scores
For many years, creditors largely relied on a business owner's personal credit scores when deciding whether to extend business credit. That has changed to a considerable extent, Chehade says.
"Personal credit is considered in the industry not ideal in predicting business behavior," he says.
FICO's Small Business Scoring Service (SBSS) differs from most business credit scores in that it combines the business credit history and the business owner's personal credit information. Chehade says this is increasingly seen as the way to go.
"Smart creditors are taking advantage of new blended commercial scoring tools that integrate both personal and business credit attributes to assess and predict small business risk," he says.
At the moment, however, business credit scores continue to be one of the most important factors controlling the way a business is seen by potential creditors, suppliers, partners, customers and others.
"By building and maintaining a positive business credit profile," Chehade says, "small-business owners will be able to more easily access the financial capital, loans and credit terms necessary to order inventory, hire more employees, expand their operations, etc."
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