Business credit scores are used widely by lenders and trading partners to determine whether or not to do business with other businesses. Business credit scores play a big role in influencing banks’ decisions to lend money and the terms of those loans.
Understanding a business credit score — what it is, how it’s calculated and what it does for a business — is the first step in building and improving your business credit score.
In this explainer, you’ll learn:
- What’s a business credit score?
- Why a business credit score matters
- How a business credit score is calculated
- Who are the major business credit scoring agencies?
- A couple of tips to improve your business credit score
What is a business credit score?
A business credit score measures how likely your business is to pay its bills on time. That’s it. Sure, there are complex ways to calculate a business credit score and lots of players with lots of data who make lots of money in this field.
But at the end of the day, all this data and number crunching produces a score (either up to 100 or up to 850) that lenders and vendors use to judge your business. They all want to know that if they lend your business money or sell you products or services on credit, will they get paid back and will they get paid back on time.
Like your personal credit scores measure your own creditworthiness, business credit scores measure your business’ creditworthiness. Outside of complete transparency, business credit scores are the best tools trading partners and lenders have to make a decision on whether to do business with your firm.
Why your business credit score matters
Business credit scores are your company’s ticket to the credit dance. Every business has to manage cash flow — the ins and outs of costs and revenues every single month.
As a business owner, you want to increase the speed you get paid when you sell something and slow down the speed you have to pay your own bills. Business credit scores help your business qualify for special payment terms from suppliers and to borrow money from banks or lenders.
According to Marco Carbajo, there are essentially 5 types of credit:
- Revolving business credit: A credit card is the best example of revolving credit. When a business takes out a credit card and spends with it, it has a limit of funds which it can spend connected to the credit card. Revolving business credit is a form of credit that can be tapped whenever a business wants and never really needs to be paid back in full. The credit just revolves.
- Term credit (or charge credit): Similar to revolving business credit, term credit has a borrowing limit that a business can draw on. The difference is that with term credit, a business would need to pay back whatever it borrowed in full at the end of the month.
- Installment credit: Installment credit is a fancy way to describe a typical business loan. With installment credit, a business borrows a set amount of money with fixed terms, like an interest rate and repayment dates.
- Service credit: When you sign up with a utility like water or gas, those companies extend services to you first before receiving payment. Most service providers work in this manner by extending services first and receiving payment later. It’s a form of credit called service credit.
- Trade credit: Suppliers can extend credit to their business customers by giving them a grace period before requiring payment. Getting a supplier to agree to let you pay 60 days after receiving your purchase helps a business manage its own cashflows.
How is a business credit score calculated?
Each credit reporting agency, like Dun and Bradstreet and Experian, calculates business credit scores a bit differently. The sources of the information they use are also different. That’s why if you pull your credit report from different providers, you’ll often see different measures of your business credit score.
Dun and Bradstreet uses a 1-100 scale for its PAYDEX score, one of the most commonly used credit scores. PAYDEX, for example, uses 12 months of a business’ payment history to see how frequently a business has paid its bills on time.
Unlike consumer credit scores, which generally use FICO’s scoring methods, there’s no agreed upon scorecard for judging business credit.
Who are the major players in business credit scoring?
There are dozens of players competing in the business credit scoring industry. The biggest player is Dun and Bradstreet. D&B’s DUNS number acts a sort of business social security number to identify and classify millions of businesses around the world. D&B also uses a credit score and financial stress score to make recommendation to lenders about how much credit to extend to your business.
Many of the same players who are active in the consumer credit space are active in the business credit space. Experian, Equifax, and FICO all compete to get their scores in front of vendors and lenders to help with their credit decisioning processes.
How to improve your business credit score?
There are lots of straight-forward steps to improve your business credit. First things first, 80 percent of business credit reports contain some type of factual error. These errors on your credit report can range from incorrect addresses and phone numbers to worse problems like another firm’s data and payment history showing up. Reach out to the credit agency and fix those mistakes (yes, even those in your firm’s favor :-)).
If your business has no credit, the first thing it can do to build business credit is to open accounts with big vendors (like office suppliers, for example). To qualify for a business credit score, a business needs to have at least 3 accounts open with suppliers. These suppliers should (it’s voluntary, so you’ll have to ask) report your payments to credit scoring firms, like D&B.
If you have poor business credit, you’ll have to do the hard work of repairing your business credit. You can start by using a secured business credit card which requires a personal security, but extends a small credit line. You’ll have to make your payments on time and after a while, you can extend your credit line. You may want to piggyback on your personal credit or a partner’s personal credit, as your business continues to improve its own credit profile.