You’ve heard a lot about your personal credit scores, but if you own a business, you may feel a bit in the dark about how your company’s credit is rated. Like your personal score, though, your business score is fairly straightforward once you understand the basics.
What is it?
As with a personal credit score, a business credit score is an attempt to measure the likelihood of repaying any particular debt. It’s simply a way for other organizations to use measurable data to try to predict the risk of doing business with you. You may also hear the scores referred to as “commercial” or “trade” scores.
Who calculates the scores?
The three major companies computing scores are:
- Dun & Bradstreet
As with personal credit ratings, your best bet is to make sure each of your scores with the leading business score calculators is in good shape.
How is it calculated?
Algorithms vary by the company crunching the numbers, but normally the main factors are:
- On-time payment history
- Public records, such as liens, bankruptcies or judgments
- Number of business relationships (higher is better)
- What percentage of your available credit is in use (lower is better)
- How long your business has used credit (longer is better)
- How many credit inquiries have been made (lower is better)
- Type of business
- Size of business/number of employees
What’s a good score?
Business credit scores use different scales than those employed for personal credit scores. For example, Dun & Bradstreet’s popular PAYDEX score ranges from 0-100 (higher is better) with a score of 75 or above considered preferable.
How do I start building a score?
If your business is a sole proprietorship or partnership, incorporate your business as either an LLC or a corporation to begin the process of getting scores. The act of incorporating legally separates your personal and business finances. It also lets you create business credit files separate from your personal ones. Next:
- Apply for an Employer Identification Number (EIN) at irs.gov
- Get a Data Universal Numbering System (DUNS) number at dnb.com and register your business for credit file data collection
- Find companies willing to extend you business credit
Keep in mind that reporting business credit file information is voluntary and that some companies you do business with may not report at all. This is why it’s smart to check your credit files from the major compilers to see what exactly is being registered for your company.
How do I see the reports and scores?
You’ll need to visit the website of the company whose information you are interested in. The major ones are:
- Dun & Bradstreet – www.dnb.com
- Equifax – www.equifax.com/business
- Experian – www.experian.com/small-business
How often do I need to check it?
Generally speaking, lending professionals advise that business owners check their business credit scores at least once per quarter.
Why does it matter?
If you want to make your business into a big-time moneymaker, you will probably need to apply for a business loan at some point. A good score can mean not only qualifying for a loan, but doing so with the best terms possible. It’s not just about lenders, though. Keep in mind that anyone who potentially encounters risk by entering into or maintaining a business relationship with you may check your scores too. Simply put, a good score can help make it easier and cheaper to do business.
How do I raise the score?
The types of behavior that typically will have the greatest positive effect include:
- Making payments on time
- Avoiding liens, bankruptcies or judgments
- Increasing your number of business relationships
- Keeping your percentage of available credit in use relatively low
- Generating revenue
- Notifying creditors and credit file compiling companies if you find errors on your reports
Is the business score all I need to worry about?
Be advised that some lenders look at a combination of your business and personal scores. In other words, don’t necessarily think that you can skate by with poor consumer scores as long as your business is looking peachy.
Having a strong business score can make your operating costs significantly smaller. For that reason alone, it’s definitely worth it to look into making the most of your score.