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Updated: November 19th, 2020
From the minute you get your first credit account, you begin to build a personal credit profile.
As you apply for credit cards or a car loan for that Subaru you love, move to different addresses, and make a (hopefully enriching!) life for yourself, your credit profile grows alongside you and paints an increasingly accurate picture of your ability to repay a debt.
Like your personal credit, your company has its own small business credit scores too—and those scores paint a different picture of your business’s ability to repay a debt.
Both types of credit scores, personal and business, can be taken into account by lenders to qualify you for financing, loans, and business credit cards.
Because your business credit scores have such an effect on your financial health, it’s important to understand what they mean.
Access to credit is the lifeblood of a small business.
Even if you’re thinking, “Well, my business is profitable and I have great personal credit, so I don’t think I’ll need to use business credit,” think again!
Start-up costs and expansion strategies are expensive, and all businesses are subject to the inevitable ups and downs of cash flow.
Using personal credit to build a small business can backfire as well, as you’ll likely need to make more and larger purchases and apply for financing opportunities, both of which can lead to lower personal credit scores.
In addition, a strong business credit score will boost your chances of:
1. Securing loans with the best rates. Banks and online lenders can use your business credit scores to prequalify you for a loan. For example, most lenders are looking for a FICO® LiquidCredit® SBSS score of 160 or higher (out of 300). They’ll often dig deeper into your business credit reports to determine the likelihood that you will pay back the loan, which can have an effect on your interest rates and how much capital you’re offered.
2. Securing better trade terms with important suppliers in your industry. Businesses with higher business credit scores are often extended better payment terms from vendors and suppliers, such as net-60 or net-90 day terms. Businesses with lower scores might be required to pay on delivery or even prepay, which isn’t so fantastic for your cash flow.
3. Winning business contracts with large companies or the government. If you want to do business with the government or Fortune 500 companies, chances are they will check your business credit and require you to have a minimum business credit score. For example, if you are a supplier for Wal-Mart, they require you to have a minimum PAYDEX score of 80.
Finally, keeping your personal finances and business profile separate will help you to avoid confusion, offer you the opportunity to get away from risky personal guarantees, and in the long run can help you save money while still giving you access to funds that help your business grow.
Establishing a great small business credit score is not an overnight job.
Successful businesses are always the result of patient work and planning, and high business credit scores are no different.
Fortunately, many have done it, and the steps to improve your business credit score are similar to that of your personal credit:
1. Pay bills on time, all the time. Pay early if you can. Paying on time will help you land a score of 80 out of 100 for one of the most popular business credit scores, the Dun & Bradstreet PAYDEX score. To score a 100, you will actually have to consistently pay 30 days early.
2. Establish and maintain good relationships with suppliers and vendors. Not only is this a great way to build a solid reputation in your industry, but your suppliers and vendors will also determine whether or not you have favorable payment terms. Make sure your vendors report to the business credit bureaus so your business credit score can reflect your positive payment history.
3. Open a business credit card. Using a business credit card for business expenses instead of your personal one is great for a number of reasons—you’ll protect your personal credit, build your business credit, and you can earn tons of rewards and bonuses with business credit cards. Just like personal credit cards, be sure to keep a low credit utilization to keep your business credit scores up.
4. Monitor your credit. About 25 percent of business owners find errors on their credit reports that put them in a riskier category. If you find errors, be sure to request a correction from the reporting agency.
There are three main credit bureaus that can provide you with a small business credit score.
Whether you’re just learning about business credit scores for the first time or you’ve known about them but haven’t checked up on yours for a while, you can go straight to the individual reporting agencies and pay a fee for two of the three major scores—the Dun & Bradstreet PAYDEX Score, and the the Intelliscore Plus℠ from Experian.
However, if you’d like to see multiple credit ratings in one place for free, you can sign up for a Nav account—you’ll receive two ratings (Experian and Dun & Bradstreet) free of charge, along with 24/7 monitoring and alerts.
Don’t know your business credit score? Not sure you’d know how to interpret it if you did? Don’t worry, you’re not alone! Our free 1-hour on-demand course on business credit covers:
Paige Smith is a Content Marketing Writer and Senior Contributing Writer at Funding Circle. She has a bachelor's degree in English Literature from Cal Poly San Luis Obispo, and specializes in writing about the intersection of business, finance, and tech. Paige has written for a number of B2B industry leaders, including fintech companies, small business lenders, and business credit resource sites.