Due diligence

What is a Business Credit Score?

by Nicolae Buldumac
What is a Business Credit Score?

Monitoring your business' credit score should be a regular practice for all companies, regardless of industry or size. Given that these reports are available to anyone who wants to see them, including potential lenders and suppliers, it is vital that you are aware of the information that yours currently contains.

Despite the importance of business credit scores and their availability to the public, a shockingly large proportion of companies know very little about theirs; according to Nav's American Dream Gap Survey, 45 percent of small business owners did not know they have a business credit score, 72 percent did not know where to find information on their business credit score and 82 percent didn’t know how to interpret their score.

So what exactly is a business credit score, why is it so important, and how can you find yours? Keep reading to learn everything you need to know below.

What is a Business Credit Score?

A business credit score is a collection of ratings that aims to signify how responsible a company has been with their finances. A number of different factors are used to determine the score, including information from banks and other credit providers, information on County Court Judgments (CCJs), and records from Companies House. Your track record of payments to other companies can also be taken into account.

Not all businesses actually possess a business credit score; in order to put one together credit bureaus first need enough data on your company's financials and credit history. Thankfully there are a number of steps you can take in order to build one, as we will discuss later in this article.

Factors That Affect it

There are a number of things that can affect your business credit score, including:

  • Credit applications - As with personal credit, a number of credit applications over a short space of time can damage your business credit score. If you make multiple applications it can give the impression that your business is failing or that you are not being responsible with your finances.

  • Payment history - Your business' payment history is used by some credit bureaus, such as Dun and Bradstreet, as an important component of your credit score. Late payments will obviously have a negative impact on this; paying invoices early will ensure yours is the best it can be.

  • Outstanding debts - If your business already owes large amounts to other lenders, this is likely to have a negative impact on your business credit score. Similarly, how invested you are personally in your business can also affect your score.

  • Company structure - The way in which your company is set up can also play a part in your credit score, and ultimately determine how easy it will be for you to borrow money; lenders are much more likely to say yes to businesses set up as Corporations or Limited Liability Companies.

  • Personal credit score - It's always a good idea to separate your personal and business credit (more on that later), though it's worth bearing in mind that a bad track record in your personal finances may mean an increased number of denials when it comes to securing credit for your business.

Why is it Important?

Having a good business credit score comes with a number of benefits for your company, including:

  • Secure funding - The most obvious advantage of having a good business credit score is being able to get money from lenders in order to start or grow your business. What's more, it will negate the need for a personal guarantee, which will ultimately mean more protection for your own assets.

  • Save money - A decent credit score will mean better interest rates from lenders, saving your business money.

  • Stay competitive - With the money saved your business will be able to separate itself from the competition by offering lower prices to your customers.

  • Win contracts - Companies may check your business' credit score before awarding potential contracts. Some credit bureaus offer information on how likely your business is to stay afloat for the upcoming year, so it is therefore vital that your report is in good stead so that other companies see minimal risks in working with you.

  • Company image - A good credit score will give a better overall impression of your business; something that is especially important considering your records are publicly available.

Not being able to gain access to credit can have a negative impact on your business for a number of reasons, as is noted in this chart from the 2016 Year-End Economic Report from the National Small Business Association:

Business VS Personal Credit

When it comes to securing funding for your business, it is always advisable to separate your personal and business credit, for a number of reasons. Firstly, if you fail to do so and your business does run into trouble, then you will be personally responsible for any unpaid debts, with creditors coming directly to you for payment. You are also likely to find it much more difficult to get a loan for your business without business credit, as well as making general transactions. Finally, you'll need business credit in order to get business insurance, and your company will seem much more professional overall if you pay using separate business funds.

Where can you Find Yours?

If you want to see what shape your business credit file is currently in, (or if you actually have one), start your search here with Global Database's Business Credit Reports.

Each credit bureau will have their own way of scoring and reporting, so it is important to take the time to familiarise yourself with the system that your chosen company uses in order to understand exactly what your report is saying about your business. You should also ensure that the information in the file is accurate and up to date; bear in mind that the report you are seeing will also be seen by any potential lenders, suppliers or business partners.

How to Build a Business Credit Score

If you find that your business does not currently have a credit score, you'll probably be wondering how to go about building one. Thankfully, there are several steps you can take in order to put your company on the map when it comes to credit bureaus, including:

  • Company structure - When setting up your business it's better to avoid sole proprietorship in order to completely separate yourself from the business. Instead, you should look at becoming a corporation or Limited Liability Company.

  • Separate finances - You should aim to keep your business and personal finances separate from the moment you first set up your business. There are still things you can do further along the line though, such as opening a separate bank account.

  • Business credit card - Using a business credit card instead of a personal one is a great way to create credit history, and they are usually easy enough to obtain; according to the 2015 Small Business Credit Survey, 80 percent of businesses reported that they were approved for one.

  • Credit terms - Get credit terms from your vendors and make sure that you pay on time. You can then ask to have the credit limit or time frame increased, and after a few successful repayments you'll have positive credit references for your business.

  • Microloans - Microloans are generally easier to get, and by paying them back in time you will be submitting positive feedback regarding your business credit back to the credit bureaus.

Maintaining a Good Business Credit Score

Once you've established a business credit score, you'll of course want to ensure that it remains in good form. With this in mind you should check your report regularly so you are aware exactly what it says and what potential lenders are seeing. Make sure that all of the information held in the report is accurate and current, and monitor it closely for changes. It's important to also look out for any suspicious activity being noted in your file that could signify your credit details being used fraudulently by others.

In order to continue growing your business credit score you should aim to work with other businesses - including lenders and suppliers - who are happy to report your payment history to credit bureaus. Keep paying your bills and loan instalments on time and you should soon see positive changes in your credit score. Don't forget to check up on potential business partners, vendors and customers for credit risks by seeking out their credit scores too -- avoiding any potential non-payments or risky deals will ultimately protect your own score in the long run.

Finally, it's important to remember that all of this will not occur overnight; in fact the average business needs 12-18 months to improve its business credit score, according to Cardhub. Building and maintaining healthy business credit is an ongoing process that can take a little work, but one that is ultimately worth the time and effort due to the advantages it can bring to your company.

Global Database is a market leader in company intelligence, and an essential tool for thousands of businesses across the globe.  With our Credit Risk platform users are able to stay up to date on any changes in their business credit file, as well as effectively managing your score by learning what factors are affecting it.

Our platform uses unique methodology to determine credit scores and suggest credit limits, while also providing background information on businesses, including possible liens, judgments, and bankruptcies. This enables your company to assess potential financial risks as well as qualify prospects and suppliers and set realistic credit limits and reduce exposure to potential bad debt.

Want to find out what we can do for you? Contact us for a no-obligation chat on +44 203 640 6006 or info@globaldatabase.com

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