A high business credit score can help you get favorable terms on loans and other types of credit
“On a smaller ticket loan request … it’s probably going to be the primary determinant they’re going to use to get that loan approved,” DesMarteau said. “Once you go above that amount, you start getting underwritten.”
A high credit score can also help you establish supplier relationships, buy insurance and even rent office space.
To keep personal and business scores high, you must pay your bills on time and avoid taking on more debt than you can repay. And if you declare bankruptcy as a business owner or as an individual, that’s usually a credit score killer and a major red flag to potential lenders.
But there are some key differences in how business credit scores are calculated. For instance, some business credit scoring models take into account how early (or late) you pay back suppliers and lenders.
Here are the key steps in building business credit and maintaining a high score, keeping in mind the factors of the most commonly used business credit scoring models.
How to maintain a good business credit score
1. Always pay your bills on time – or ahead of time, if possible.
Making all of your credit card and loan payments on time is the most important factor in maintaining a good consumer credit score. The same is true in business credit.
“Late payments negatively impact your credit, which could be detrimental when it comes time to get a business credit card or line of credit,” said Julie Pukas, head of U.S. Bankcard and Merchant Solutions at TD Bank.
But unlike your FICO consumer score, you can be rewarded for being an early payer in some business scoring formulas. Under its Paydex scoring model, Dun & Bradstreet assigns you a score of 80 if you pay your bills on time. But if you consistently pay suppliers 30 days in advance, you can achieve the maximum Paydex score of 100.
2. Work with lenders and suppliers who report to credit bureaus.
If you re-pay your lenders and suppliers early every time, that’s great for your business’s reputation. However, it won’t help your business credit score if those firms don’t report your good payment habits to the credit bureaus.
Before you enter a relationship with a lender or a supplier, confirm with them that they will in fact report your payment history to the bureaus. Additionally, some business credit bureaus offer tools (such as Dun & Bradstreet’s CreditBuilder Plus) that enable owners to have their account information reported.
“Businesses can ask their partners or clients to submit trade references to Dun & Bradstreet, or they can use a business credit-building solution to submit trade references themselves,” said Amber Colley, business credit expert at Dun & Bradstreet.
3. Don’t use too much credit.
Some business credit score models take into account how much of your business’s available credit you’re using. A low credit score dragged down by overutilization can give lenders the impression your business is overextended or is having trouble making ends meet.
4. Get a business credit card for everyday expenses.
Taking out loans for big purchases is a common practice for businesses of all sizes. Many also use business credit cards for everyday purchases, such as supplies, utility bills and travel. A card can boost your credit score as long as you make at least the minimum payment on time each month and keep balances low relative to your credit limit. Experts advise picking a card that caters to your business’s individual needs.
“A credit card is a great option for recurring or small expenses that can be paid off quickly,” Pukas said. “For business owners who are frequent travelers, a card that rewards on gas could be a smart option, or for those who regularly entertain clients, a card that offer cash back on dining may be a better fit.”
5. Keep your personal credit intact.
Some business credit scoring models, including those offered by Equifax, Experian and FICO, can incorporate personal as well as commercial credit data. Experts strongly recommend keeping your business and personal credit separate, but it’s critical not to ignore one to the detriment of the other. And letting both scores slip could prevent you from getting any credit at all, even if your business is profitable.
“If we see someone who has a really bad business credit score and a really bad personal credit score, a lot of times we won’t do the deal – even if they have the cash flow,” TD Bank’s DesMarteau said. “Their character is in question, but it can also be an early warning indicator. If they can’t make their bill payments, the cash flow’s not going to look good beyond the date it’s calculated.”
As you work to maintain your business’s credit score and its overall health, keep in mind the five factors of FICO’s traditional credit scoring model when managing your personal credit. After all, if your business is new and has little or no credit history, your own personal credit will likely determine how much you’ll be able to borrow or which business credit cards you can qualify for to fund your operations.
6. Stay on top of your business credit score.
It’s important to always know where your credit stands, but opinions are mixed as to whether you should pay for a business credit monitoring service.
“As you pay bills, experience cash flow issues and take on debt, your own scores and ratings can be impacted,” Colley of Dun & Bradstreet said. “You’ll want to know what your scores are at all times if you’re bidding on contracts – some scores could help make or break your bid.”
Evan Roberts, founder of Maryland-based real estate investment firm Dependable Homebuyers, said his company does not subscribe to a credit monitoring service because it gets credit updates from its lenders.
“We’re lucky enough to be in a position where our credit score was good off the bat, so it wasn’t like we needed to continuously monitor it and change our behavior to improve it,” Roberts said. “Every time we go to get a loan, we receive a new report and that gives us an update. Our credit scores stay pretty consistent.”
Most commonly used business credit scoring models
Dun & Bradstreet Paydex Score: This score measures a business’s payment history and assigns a risk score on a scale of 0 to 100, with the latter representing the lowest risk. The Paydex score takes into account how far in advance or how long overdue you make payments to suppliers and vendors.
Experian Intelliscore Plus: Experian’s primary business credit score uses a 1-to-100 risk score (with 76-100 representing the lowest risk and 1-10 the highest), but it evaluates more than just your payment history. It also incorporates factors such as credit utilization, number of trade lines and business size.
Equifax Business Credit Risk Score: Equifax’s credit risk score uses a range of 101-660, and a higher score indicates lower risk. The bureau includes a variety of information in its business credit reports, including a summary of credit accounts with banks, suppliers and service providers and public records such as bankruptcies, liens and Secretary of State business registration.
FICO Small Business Scoring Service score: FICO’s scoring system uses a score ranging from 0-300, with 300 representing the lowest risk. The FICO model uses four data inputs – consumer bureau reports for a company’s principals and guarantors, business bureau reports, application data and business financial data.
Credit scores are complex, but achieving good credit is not
Even though credit scoring formulas can be difficult to understand, achieving a high personal credit score is not complicated. Neither is maintaining a good business credit score. If your business is in good financial health, chances are your credit score will remain high.
With a strong credit profile, you’re poised to build relationships with banks, suppliers and, most importantly, customers. That’s a recipe for success for any company.