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Business Credit Score: Meaning And How To Build It

If you're going to grow your business to its full potential, you must treat your business credit as important. Your business credit score will determine if you'll ever qualify for funding or if you always have to use your money.

To build your business credit score, start by establishing your business as a separate legal entity and getting a business bank account. All your business transactions must go under your business account. Also, regularly monitor your business credit report for inaccuracies and address any issues promptly.

Building a good business credit score takes time and responsible financial management, but it can unlock valuable financing opportunities and enhance your company's financial reputation. This article will teach you everything about your business credit score, how it works, and how to build it.

What Is A Business Credit Score?

A business credit score is a number that represents a company's creditworthiness. It serves as a critical indicator of a business's ability to manage its financial obligations and repay debts, and it's used by lenders, suppliers, and other stakeholders to assess the risk associated with extending credit or entering into financial agreements with the business.

Here are key facts about business credit score:

  1. Financial Health Evaluation: Business credit scores are used to evaluate a company's financial health and its likelihood of repaying debts on time. A higher score indicates a lower credit risk, making it easier for a business to secure loans and favorable terms.

  2. Separate from Personal Credit: While personal credit scores reflect an individual's financial history, business credit scores focus exclusively on a company's financial activities.

  3. Credit Reporting Bureaus: Business credit scores are maintained by credit reporting bureaus, such as Dun & Bradstreet, Experian, and Equifax. These bureaus collect and analyze data related to a business's credit history, payment behavior, and other financial transactions. This data includes information on a company's payment history, outstanding debts, credit utilization, legal filings (such as bankruptcies or liens), and more.

  4. Credit Reporting Timelines: Business credit reporting is ongoing. Companies that extend credit or provide services to your business may report your payment behavior and financial transactions on a regular basis. This means that every payment you make, whether it's to suppliers, lenders, or creditors, can impact your business credit score.

  5. Credit Ranges: Business credit scores typically fall within a range, with the exact range varying between credit reporting agencies. A higher score indicates a lower credit risk, while a lower score suggests a higher risk. Potential lenders and partners use these scores to assess whether they want to do business with your company and on what terms.

What are the Factors Impacting Your Business Credit Score?

Several factors influence a business credit score, including payment history, outstanding debts, credit utilization, public records (such as bankruptcies or liens), and the length of a company's credit history.

How Is Business Credit Score Calculated?

Business credit scores are calculated using a combination of data and complex algorithms developed by credit reporting bureaus such as Dun & Bradstreet, Experian, Equifax, and TransUnion. These algorithms are designed to assess a company's creditworthiness and its likelihood of repaying debts.

While the specific calculation methods can vary slightly between bureaus, several key factors are universally considered in the calculation of a business credit score:

Payment History (35-40%): Payment history evaluates whether a company makes payments to creditors, suppliers, and lenders on time.

Outstanding Debts (30-35%): The amount of outstanding debt a business carries, compared to its available credit limits, influences its credit score. High levels of debt relative to available credit can negatively affect the score.

Credit Utilization (10-15%): Credit utilization measures the percentage of available credit a business is currently using. For instance, if a company has a credit limit of $10,000 and is using only $2,000, its credit utilization rate is 20%.

Public Records (Bankruptcies, Liens, Judgments) (10-15%): Public records, such as bankruptcies, tax liens, and legal judgments, can significantly impact a business credit score.

Length of Credit History (5-10%): A longer credit history can positively influence the score, as it provides more data for assessing creditworthiness.

Industry Risk Factors: Some credit scoring models take into account industry-specific risk factors. These factors consider the typical financial characteristics and challenges of a particular industry when calculating a business credit score.

Size and Structure of the Business: The size and legal structure of a business can sometimes affect its credit score. For instance, a small business may have a different scoring model compared to a larger corporation.

Credit Inquiries: Each time a company applies for credit, it generates a credit inquiry. Multiple inquiries within a short period can potentially lower a business credit score, as they may indicate financial instability.

What Is A Good Business Credit Score?

A good business credit score typically falls within a specific range, and what is considered "good" can vary slightly between credit reporting agencies. In general, a business credit score of 80 or above (on a scale of 0 to 100) is often considered good.

Different credit bureaus may use their proprietary scoring models and scales, so it's essential to understand the specific range and criteria used by the credit bureau you are dealing with.

Experian Intelliscore Plus: Experian's Intelliscore Plus, a commonly used business credit scoring model, counts from 1 to 100. A score of 76-100 is a good credit score.

Dun & Bradstreet PAYDEX Score: Dun & Bradstreet PAYDEX score, another widely used scoring system, considers scores of 80 or higher as good.

Equifax Business Credit Score: Equifax's business credit scoring typically ranges from 101 to 992, with a score of 660 or higher often considered good.

How To Improve Your Business Credit Score

Improving your business credit score is crucial for enhancing your company's financial reputation, gaining access to better financing options, and securing favorable terms with suppliers and partners.

Here are effective strategies to help you boost your business credit score:

1. Establish a Strong Credit Profile from the Start

Incorporate Your Business: Formally registering your business as a separate legal entity (e.g., LLC or corporation) can help separate personal and business finances, which is essential for building a strong business credit profile.

Obtain an Employer Identification Number (EIN): An EIN is like a social security number for your business. It's crucial for opening business bank accounts and establishing credit in your company's name.

2. Open Business Credit Accounts

Apply for Business Credit Cards: Securing business credit cards in your company's name and using them responsibly can help build a positive credit history. Pay your bills on time and in full.

Establish Trade Credit: Work with suppliers who report payment histories to credit bureaus. Building a history of prompt payments with vendors can have a positive impact on your credit score.

3. Pay Bills Promptly and Consistently

Ensure that all your business bills, including loans, credit cards, and trade accounts, are paid on time. Late or missed payments can harm your credit score significantly.

4. Monitor Your Business Credit Report Regularly

Request and review your business credit report from major credit bureaus periodically. Check for inaccuracies, errors, or discrepancies and dispute any incorrect information promptly.

5. Manage Credit Utilization

Keep your credit utilization ratio low by not using all of your available credit. Maintaining a balance of credit use that is well below your credit limits is viewed positively.

6. Diversify Your Credit Mix

A diverse mix of credit types, such as credit cards, lines of credit, and term loans, can be beneficial for your credit profile. However, only take on credit that your business genuinely needs.

7. Avoid Excessive Credit Applications

Be selective when applying for new credit. Multiple credit inquiries in a short period can temporarily lower your score. Apply for credit when necessary, but avoid unnecessary applications.

8. Address Negative Records Proactively

If your business has any negative records, such as tax liens or judgments, take steps to resolve them as soon as possible. Paying off liens and settling judgments can improve your credit standing.

9. Seek Professional Assistance

If your business credit score needs significant improvement, consider consulting with a Biz Credit Devyn to develop a tailored plan for you. As a business credit consultant, we help business owners build and improve their business credit scores, allowing them to qualify for loans, credit lines, and other forms of funding.

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