Jameson Parker
Personal credit scores are an important part of our financial lives that affect the way we live and transact in the modern marketplace. What can be easily overlooked by some, however, is that businesses are also given a credit rating based on a variety of factors. Just as with a personal credit score, a business’s credit score can greatly affect how it operates within the market, making it imperative for those looking to own a business to understand how to build a quality credit rating.
Simply put, a business credit score is a numerical representation, typically ranging from 0 to 100, that assesses a company’s creditworthiness and ability to secure loans or business partnerships. Just as a few select credit bureaus determine personal credit, there are three main entities that establish and track business credit:
- Dun & Bradstreet: Focuses primarily on a business’s payment history with vendors and other suppliers. They develop and assign a PAYDEX score to an organization, which is a dollar-weighted indicator intended to reflect a business’s past payment performance. Companies receive a score between 1 and 100, where a higher number represents a greater likelihood that a business will pay its debts on time.
- Equifax: Equifax transforms data collected by the Small Business Finance Exchange (SBFE) into a report. The SBFE is an association of U.S. small business lenders that report payment data on their small business customers. Because this data directly reflects how small businesses interact with lenders, banks use it to evaluate your creditworthiness.
- Experian: The Experian Business Credit Score, known as Intelliscore Plus℠, helps predict how likely a business is to make timely payments. Unlike personal credit scores, your business credit score is public. This means anyone — potential lenders, partners, or even competitors — can check your company's credit profile at any time.
It is worth noting that although all three bureaus have their own unique scoring systems, the numerical ratings for their basic payment performance scores work the same across the board. The scale ranges from 0 to 100, with a higher number indicating a better probability that a business will pay its debts on time. It is also worth noting that Equifax and Dunn & Bradstreet report other scores besides those representing the payment index, including credit risk, failure risk, cyber risk, and supplier evaluation scores.
Why it Matters
Just as a suboptimal personal credit score can follow an individual and put a damper on their financial pursuits, a low business credit score can limit an organization’s ability to operate effectively. Vendors may be reluctant to do work for a company with a low credit rating, and suppliers will be much less willing to extend credit or may require payment upon delivery for certain goods.
Each facet of the three different bureau’s scores has specific relevant time periods in which they can affect a company’s credit score:
- Dun & Bradstreet: Transactions affecting PAYDEX score are retained for up to 24 months. Information regarding lawsuits, liens, and judgments can be retained for 10+ years.
- Equifax: Commercial credit report information is available for 24 months, bankruptcy is generally reported for 10 years, and judgments/liens are reported for 7 years.
- Experian: Trade data is reported for 36 months, bankruptcies for 9 years and 9 months, judgements for 6 years and 9 months, liens for 6 years and 9 months, and collections for 6 years and 9 months.
Establishing/Maintaining a Business Credit Score
Before you can maintain or improve your business credit, you must first establish it. Experian recommends completing a few steps before you request business credit in your company’s name:
- Incorporate or form an LLC (Limited Liability Company) to ensure your company is seen as a separate business entity.
- Obtain a federal Employer Identification Number.
- Open business bank accounts in your legal business name.
- Set up a dedicated business phone line in your business name and make sure it's listed.
Once you have laid the groundwork for your business to begin establishing credit, you can begin to monitor a few key metrics to ensure that your score is high and remains that way:
- Keep your credit card utilization below 30%.
- Pay bills on time and in full.
- Regularly monitor your business credit report.
- Carefully monitor your cash flow to ensure it remains healthy.
- If you are the owner, ensure your personal credit score remains in good standing. While it is always good practice to keep personal and business matters separate, lenders and investors do consider both scores when determining the ability to secure a business loan or a capital partnership.
