Your personal credit is the major ingredient of your financial power.
It’s the tool that allows you to qualify for mortgage financing, a higher credit card limit, and the number that is meant to represent your ability to repay a debt.
But like your personal credit, your business has its own credit scores too, and those scores paint a different picture of your business’s ability to repay a debt. Your business’s credit scores are being used with more and more frequency to qualify your business for trade credit, loans, and business credit cards amongst other things affecting your business.
What are business credit scores?
In the same manner that your personal scores serves as financial ratings, your business= credit scores rank the creditworthiness of your business. A number of factors influence your business credit score, including: payment history, credit utilization ratio, company size, industry risk, and more.
There are a few different business credit scores:
- FICO® LiquidCredit® Small Business Scoring Service℠ is used by lenders to determine the likelihood of on time payments. The FICO SBSS score is based upon personal and business credit history, along with other financial information. The SBA uses this score to pre-screen applications for commercial loans under $350,000. Scores range from 0 to 300, where the minimum score to pass the SBA’s prequalification is currently 140.
- Dun and Bradstreet PAYDEX Score is used by suppliers and vendors to determine what terms to extend on trade credit (eg. net-30, net-60, etc). Scores range from 1 to 100, higher scores indicating better payment performance.
- The Intelliscore Plus℠ from Experian is used by lenders to determine the likelihood of delinquency over the next 12 months. Again, scores range from 1 to 100.
It’s worth noting that each scoring agency may compile different information on the same business. Thus, it may be that all three of your business credit reports and scores are different. (Pro tip: the only place where you can check all three of your business credit ratings and reports is Nav.com).
Why are they important?
As a business owner, you already know it’s important to keep track of your business’s financial health. Good business credit scores can help you in a number of ways, including:
- Securing financing. Lenders might use your business credit scores to qualify you for a loan, or offer you better rates. For example, if you are applying for an SBA loan, you are required to have a minimum FICO SBSS score of 140, and most lenders will look for businesses with a score of 160 or above. It’s a good idea to check your FICO SBSS score before starting the SBA application process.
- Winning business contracts with large organizations. Large companies, as well as the government, may check your business credit reports before they offer you a large contract. They do this to make sure their suppliers are reliable and pay their bills on time to subcontractors and creditors.
- Securing better trade terms. If your business credit scores are high, your suppliers and vendors will give you favorable terms to purchase on credit. For example, if you are a contractor with high business credit scores, your supplier might give you a $10K line of credit and the payment won’t be due until 60 or 90 days after the purchase, giving you more flexibility to control cash flow.
Whether or not you’re searching for financing opportunities or new business relationships, building your business credit profile now is a great idea—it can open up many doors now and in the future that will help you run and grow your business to its full potential.
Gerri Detweiler is Head of Market Education for Nav, which provides business owners with simple tools to build strong business credit. Her articles have been widely syndicated, and she writes a column for Money.com. She is also the coauthor of Finance Your Own Business: Get on the Financing Fast Track.
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