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A crash course on the basics of business credit

Thursday, August 24, 2023

From medical exams, to driver’s ed tests, to GPAs, to how many points you put on the board in a basketball game — your whole life, you’re defined by scores. Love it or hate it, numbers ranking your performance are everywhere. And they don’t go away once you graduate.

From the moment you start paying your own bills or open a credit card, you’re defined by a new number: your personal credit score.

But what happens when you start a business and suddenly represent more than just yourself?

That’s where another key number comes into play: your business credit score. While business credit scores hold equal importance to personal credit scores for business owners, education about business credit can easily fall through the cracks. If that’s you, you’re not alone. You’re also in the right place.

So, what’s the big deal about business credit?

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You likely already know all about the importance of managing your personal finances in order to avoid delinquency and bolster your financial health — it’s the same drill with your business finances.

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For small business owners, maintaining a good business credit score is one of the smartest ways to position yourself for growth. Focusing on your business' credit rating and keeping up with credit monitoring to ensure your score remains positive is key to your business’ long-term success.

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Understanding business credit scores 101

Let’s take it from the top: What is a business credit score?

It’s a number that represents the creditworthiness of a business in the same way your personal credit score measures your personal creditworthiness and ability to get approved for loans, credit cards and lines of credit. Business credit scores are used by lenders, suppliers and other stakeholders to gauge the risk involved in lending to or even doing business with your company.

How does your business credit score differ from your personal credit score?

First (and most importantly), your business credit score is public, meaning that anyone can request to see your score at any time. Also, while your personal credit score ranges from 300 to 850, a business credit score typically ranges from 0 to 100. Keep in mind, this can vary depending on the credit reporting agency.

What factors make up your business credit score?

We’ll go into more detail about this shortly, but here’s a brief overview: Payment history, credit utilization, length of credit history, business size, industry and negative public records such as bankruptcy or liens can all influence your overall business credit score. Combined, these factors create a profile that puts a number to your business' financial reliability and trustworthiness.

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What’s so important about a good business credit score, anyway?

As a busy entrepreneur, you’re likely strapped for time. So, why should you put precious hours and energy into maintaining a good business credit score? Glad you asked. Here are the top three reasons.

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1. Better loan terms and interest rates

The higher the score, the bigger the loan. If your business credit score is high, it can significantly improve your ability to secure better small business loan terms and lower interest rates. Lenders use your score as a key benchmark when considering whether or not to approve a business loan, how much they're willing to give you and at what rate. A good score often indicates lower risk, leading to more favorable conditions for borrowing.

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2. Increased trust from suppliers and vendors

A good score earns you a good reputation. If you have a good business credit score, the suppliers and vendors your business has to work with to succeed (think equipment, services, maintenance, suppliers) are more likely to trust you. Why? It indicates your business’ ability to fulfill its financial obligations, making your business a more reliable — and desirable — partner. This means you get better trade credit terms, such as extended payment terms or even higher credit limits.

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3. Greater business opportunities and partnership potential

Few things open doors faster than a strong business credit score. If you’ve been hoping for better business opportunities or lucrative partnerships, upping your score could be the key. With an excellent score, other businesses will view your company as financially stable and trustworthy. As a result, they’ll be more likely to jump at the chance to start a partnership, collaboration or joint venture with you. Think of your business credit score as both a financial tool and a strategic asset.

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How is your business credit score generated?

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Payment history

Punctuality doesn’t just score you points for politeness. If your business is always on time when paying suppliers, lenders and creditors, it will positively influence your score. On the other hand, if you're late or regularly missing payments, your score will be negatively affected. Making a payment a few days late might not seem like a big deal, but it’s important to remember that your business credit score continually factors in your business’ track record for meeting its financial obligations. Every payment counts.

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Credit utilization rate

Credit utilization rate is just a fancy phrase for the percentage of available credit your business is currently using. For example, if you have a $10,000 business line of credit and are only using $2,000 of it, your credit utilization rate would be 20%. A lower utilization rate is what you want to aim for since it suggests you're good at managing your credit. While it might seem counterintuitive, taking advantage of your full credit limit could lower your score. That’s because high utilization can give the impression that you have poor cash flow management and rely too much on borrowed funds.

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Business’ credit length

Credit length is simply referring to how far back your business’ credit history goes. A longer history gives lenders more data to assess your financial behavior and determine your creditworthiness. In contrast, small businesses with shorter credit histories might have a harder time getting lenders to bite. Since there’s less information available to make a decision, it becomes a greater potential risk for the lender.

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Public records (bankruptcies, liens, etc.)

Any public record of bankruptcies, liens or other forms of financial distress can significantly bring down your business credit score. These types of situations indicate severe financial issues, which would suggest a higher risk to potential lenders or business partners. Once again, your financial history follows you — sensing a trend, yet?

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Risk factors related to industry or market

This one might not be in your control, but it’s still important to know. Certain industries are considered riskier than others because of their market volatility, regulatory environment and other factors. If your business operates in a high-risk industry according to your bank, it might impact your business credit score negatively. That said, if you operate within a stable, low-risk industry, it can have a positive impact on your score.

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The big 3 credit reporting bureaus for businesses

We’ve gone over what a business credit score is made of, but who’s in charge of calculating it?

Business credit scores are typically generated and held by three major business credit reporting agencies: Dun & Bradstreet, Experian and Equifax. Each agency has its own scoring models and plays an essential role in helping lenders assess the risk of extending credit to businesses.

  • Dun & Bradstreet PAYDEX Credit Report: Dun & Bradstreet uses a proprietary system called PAYDEX that only considers payment history to determine scoring, which ranges from 0 to 100. The higher your PAYDEX score is, the better your payment performance looks to lenders.

  • Experian Business Credit Report and FICO® Score: Experian uses its "Intelliscore" business credit score, which also ranges from 0 to 100. However, they consider several factors to determine scores, including credit utilization, public records and the business' demographic information.

  • Equifax Business Credit Report: Equifax offers two types of business credit scores: 1) The Business Credit Risk Score predicts the likelihood of severe delinquency or charge-off (when a lender writes off a debt because they don't believe they'll be able to collect the money owed) within the next 12 months. 2) The Business Failure Score predicts the likelihood of a business shutting down without paying all of its obligations in full over the next 12 months.

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How do you check your small business credit report?

So, your score is out there. Now, the question is how do you find it?

The process for checking your business credit file to access your report and score is fairly straightforward. You can get your report by visiting the website for either Dun & Bradstreet, Experian or Equifax. Each of these providers has their own process to request a credit report online.

Typically, you'll need to provide basic information about your business, including your Employer Identification Number (EIN) and business address. Once you submit, you'll then pay the credit bureau's fee to access your business credit report and business credit score.

Once you have your digital report in hand, it's a matter of understanding the financial information displayed on it. Your report will typically include your:

  • Business' credit score

  • A breakdown of your payment history

  • Credit utilization rate

  • Length of credit history

  • Public records (liens or bankruptcies)

  • Other information regarding your business' financial health

If there's any information you don't recognize or know to be false, be sure to dispute these with the credit bureau immediately (especially if there are any negative marks or discrepancies). Regularly reviewing your business credit report will help you understand your business' financial standing and catch any errors early before they have time to negatively impact your score. This is one instance where being a day late and a dollar short can have serious consequences.

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How do you build a good business credit score from scratch?

If you're just starting out and don't yet have a business credit score, you’re in a great spot. Now is the perfect time to build good habits and start your score off on the right foot.

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Get your business and business bank account set up

First up is registering your business as a legal entity and obtaining all the necessary permits and licenses that will make your operation legitimate. You'll also need a dedicated business address — even if your business operates online. This is an essential step in separating your business from your personal ventures.

Next, you'll need to apply for an Employer Identification Number (EIN) from the IRS. Think of an EIN as a Social Security number for your business. Credit bureaus use your EIN to track your business' credit history.

After you get your EIN set up, you can open a business bank account where all of your business finances will be held and tracked. Your business bank account will accomplish two important things for you: 1) Keep your personal and business finances separate and 2) provide a record of your business transactions.

Once you have a business bank account, you’ve got the green light. You can begin looking at loan options, business credit cards and business credit lines. (More on that in a minute!)

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Leverage trade credit for building business credit

If you’re not familiar with trade credit, it’s an agreement where a supplier provides goods or services to a business with the understanding that payment will be made at a later date. It can play a big role in building a robust business credit score. Some vendors or suppliers may offer repayment terms of 30, 60, 90 or even 120 days, which enables businesses to better manage their cash flow while still funding new contracts.

As you set up trade lines and consistently purchase and make timely payments on them, you’re establishing a positive payment history. And if your suppliers report to credit bureaus, this will boost your business credit score. Overall, responsibly managing trade credit can be a powerful tool if you're looking to build or improve business credit.

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Use business credit cards to improve your business credit score

Another effective tool for building and improving your business credit score is a business credit card — as long as you commit to using it responsibly. Think of it like salt. If you use salt the wrong way, it can ruin a dish fast. If you use it responsibly, it can take your cooking to the next level. The same goes for business credit cards.

Using your credit card responsibly means always paying your credit card bills on time and keeping a low balance whenever possible (aiming for under 30% is a good rule of thumb). Remember, late or missed payments have the power to negatively affect your score — so does high credit utilization.

You’ll also want to keep in mind that credit cards can carry high interest rates and fees. It’s a slippery slope to accumulating debt if you aren't careful. Finding it difficult to pay off your balance in full each month could be a sign your business is overspending. This creates a vicious cycle that can lead to more significant financial problems down the line.

The bright side? If you use business credit cards responsibly, it’s a great way to establish positive credit history, increase your credit limit over time and improve your overall business credit score.

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Take out business loans to improve your business credit score

Last but not least, securing and properly managing a business loan is another way to improve your business credit score.

There are various types of business loans available, such as term loans, business lines of credit or Small Business Administration (SBA) loans that serve different needs. Whichever type you go with, when your business takes out a loan and makes payments on time each month, it builds positive payment history which will positively impact your score. Once again, it’s all about consistency.

If you decide to take out loans or credit lines, you'll want to make sure you have a solid repayment strategy in place. This might mean setting up automatic payments, creating a dedicated repayment fund in your budget or using the loan to generate revenue through investments to ensure you can pay it back. Remember, you want to show lenders that you can handle debt responsibly. So only borrow what your business needs — and can afford to repay.

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How to maintain a good business credit score

Once you’ve got a good credit score, you want to hold on to it. We touched on some of these tips earlier, but here’s a recap of the habits you need to adopt to keep your score from dropping:

Monitor your credit reports regularly

Much like deep cleaning your house or getting an oil change, while monitoring your credit report might not be top of mind, it’s an important task to build into your routine in order to avoid dire consequences down the road. Regularly reviewing your business credit report is the only surefire way to understand your current credit status — and identify and dispute errors quickly. Keeping track of the changes in your credit score also provides insight into how your past financial decisions are affecting your current credit standing. Analyzing these patterns will help you build a more informed long-term strategy.

Keep a low credit utilization ratio

A low credit utilization ratio (when you only use a small portion of your available credit) shows credit bureaus and lenders that your business manages its debts responsibly. It’s a good idea to keep your utilization rate below 30% to maintain a good credit score.

Update your information with credit bureaus

While it might seem like the last thing you have time for, keeping your information current with credit bureaus is critical to maintaining an accurate score. If your business moves, changes its name or makes any other significant changes, take the initiative to update this information so the reporting agencies have the most accurate data on hand.

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How to repair a damaged business credit score

We get it. Sometimes despite your best intentions, things that are out of your control can hurt your score. If you get a low business credit score, it’s not the end of the world. While you shouldn’t expect repairing it to be a quick fix, if you’re willing to roll up your sleeves and do the work, you can absolutely increase that number.

Displaying consistent, positive financial behavior over time will raise your score and place your business back in good standing. Here are four key ways to repair a damaged score:

  1. Obtain your business credit reports from all of the major credit bureaus to understand what specifically is damaging your score. Look for any inaccuracies and dispute them immediately.

  2. Prioritize paying your bills on time. Missed or late payments are one of the biggest factors that can sink your score. If you can, pay down your debts beyond the principal amounts to lower your credit utilization ratio.

  3. Consider establishing trade lines with suppliers who report to credit bureaus as a way of increasing your positive payment history.

  4. Continue to monitor your credit reports regularly to track your progress and catch any errors quickly.

If your situation has grown too severe, too complicated or too time-consuming to navigate on your own, it might be time to consider hiring a credit repair service provider. These service providers can negotiate with creditors on your behalf, help you manage your debt and guide you in rebuilding your business credit score.

A word of warning — be on the lookout for scams. Do your research before selecting a credit repair service to make sure they’re trustworthy and come recommended by others.

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Ready to work with a partner who knows what it’s like to start a business?

Crash course complete! You’re ready to build up your business credit score — but you don’t have to do it alone.

Maintaining good credit is a lifelong pursuit. And Heartland is here to help every step of the way. By leveraging our powerful financial services tools, library of resources and expert support, you’ll be all set to manage your small business credit score like a pro.

Reach out whenever you're ready to learn more about how we can help you take charge of your finances and unlock growth for your business.

Frequently asked questions (FAQs)

Yes, businesses have business credit reports just as individuals have personal credit reports. These reports contain an overall credit score that is calculated by a business credit bureau based on the company's credit history.

To get a credit score for your business, you need to separate your business finances from your personal finances. That means getting an Employer Identification Number (EIN), opening a business bank account and setting up trade credit with vendors who report to business credit bureaus. Over time, your business' financial activities will help build up your business credit score.

Business credit scores are used by lenders, vendors and other business partners to assess the financial stability of a business. A good credit score can lead to more favorable loan terms, increased trust from suppliers, lower interest rates and better business opportunities.

When you form an LLC, you start without a business credit score. Your score is built over time as your business engages in financial activities that are reported to business credit bureaus, such as borrowing and repaying loans or registering trade lines.

Several factors can influence your business credit score, including your payment history, credit utilization ratio, the length of your credit history, public records such as bankruptcies or liens and any risk factors related to your specific industry or market.

The best way to build business credit is to establish your business as a separate financial entity, pay your bills on time, maintain a low credit utilization ratio and review your business credit report regularly to ensure your score is accurately represented.

Scoring models vary between credit bureaus, but typically a score in the high 80s or 90s (out of 100) is considered excellent. That said, a score over 80 is generally considered good by most reporting agencies.

Disclaimer: The information provided in this document does not, and is not intended to constitute legal advice; instead, all information, content, and materials available are for general informational purposes only. Information provided may not constitute the most up-to-date legal or other information, and readers of this information should contact their attorney to obtain advice with respect to any particular legal matter, in the relevant jurisdiction. All liability with respect to actions taken or not taken based on the contents here are hereby expressly disclaimed.

Heartland is the point of sale, payments and payroll solution of choice for entrepreneurs that need human-centered technology to sell more, keep customers coming back and spend less time in the back office. Nearly 1,000,000 businesses trust us to guide them through market changes and technology challenges, so they can stay competitive and focus on building remarkable businesses instead of managing the daily grind. Learn more at heartland.us