What is business credit and why do I need to know my business credit score?
Believe it or not, most business owners don’t know they have business credit with a business credit score. What is business credit you ask? It is a number indicating whether a company is a good candidate to lend money to or do business with.
The score is determined by factoring in a company’s credit obligations and repayment histories with lenders and suppliers. Any legal filings such as tax liens, judgements or bankruptcies will be considered as well. Also, the length of time that a company has been operating, based on their size and type, and finally, their repayment performance relative to that of similar companies helps determine a company’s business credit score.
Just like a personal credit score, the higher the score, the lower the lending risk. However, business credit is on a score of 0-100, unlike personal credit which is on a score of 300-850. For business owners, 100 is the magic credit score.
Who scores your credit you ask? The big, bad credit reporting firms — Experian, Equifax, and Dunn & Bradstreet. They will run a credit report for your business to determine how a business manages its financial obligations. This includes actual trade payment experiences, public record information, company background, collection information, and comparative data placing a company’s payment performance in context with its industry. From this point, they will take your business report and calculate your business credit score.
Your business credit score is calculated based on credit, demographics, and public records. Your credit includes credit utilization, payment habits, balances, and trends. Your demographic details include your business size, years in business, and your Standard Industrial Classification (SIC). The public records share the amounts and frequencies associated with bankruptcies, judgements, and liens.
The length of time this data stays on your business credit score differs from agency to agency, but here is an example of Experian’s approach:
- Tax liens:6 years and 9 months
- Bankruptcies:9 years and 9 months
- Judgments:6 years and 9 months
- Trade data:3 years
- Collections:6 years and 9 months
- Uniform Commercial Code filings:5 years
- Bank, government, and leasing data:3 years
The three major benefits to building business credit are:
- Large Credit Capacity – Businesses have 10 to 100 times greater credit capacity compared to personal credit. As a creditworthy business, your company will be in a position to qualify for financing based on factors strictly related to the business. Without building business credit, you will have to continue to rely on your personal credit.
- Increase Company Value – A creditworthy business has a powerful advantage in its financing ability. This asset is fully transferable with the business and it makes it very attractive for a potential buyer or investor.
- Protect Personal Credit– A business owner will be able to limit, if not eliminate, the use of personal credit checks since the company has its own credit ratings. This prevents a business owner from having to commingle personal credit, personal debts, and personal assets with its company.
We at Commercial Funding Source are here to help you navigate the lending jungle. We can advise and guide you through the process and serve as a liaison with the lenders. We have access to a large number of resources and lending programs, which saves you time and money. Our process starts by listening to our clients and borrowers to identify solutions and present the best options to get you approved for financing.
Contact one of our expert advisers today to explore your options.