Business Credit Score

What Is a Business Credit Score and How Does It Work?

Did you know that poor credit history is one of the main reasons why loan applications for small businesses are often declined?1

By understanding how business credit works and taking proactive steps to build and maintain a positive credit profile, companies can position themselves for long-term success and growth.

Key takeways

  • A business credit score is like a personal credit score, except it reflects on the financial health and creditworthiness of a business. 
  • A good business credit score credit can help you gain access to more financing opportunities, qualify for lower interest rates, negotiate better terms with vendors and suppliers, and more.
  • Building business credit takes time, so it’s important to start sooner rather than later.

What is a business credit score?

A business credit score is a numerical representation of a company’s creditworthiness and financial health. It is calculated based on various factors, such as2:

  • Your business’s payment history
  • Age of credit history
  • Debt and debt usage
  • Industry risk
  • Company size

How does business credit work

Business credit works similarly to personal credit but focuses on the creditworthiness of a company rather than an individual. Just as personal credit agencies collect data on individuals’ credit behavior, business credit scores are calculated by three main credit bureaus: Dun & Bradstreet, Equifax, and Experian.

However, each business credit bureau looks at the information they gather in a slightly different way, which can make understanding business credit reports a bit confusing. That’s why we wrote an article to help you better understand how the “big three” business credit bureaus work.  

What is business credit used for?

Business credit can serve as a powerful asset that validates your business’s financial health, credibility, and potential for success. Specifically, good business credit can:

  • help secure financing, such as loans or lines of credit, from banks and other financial institutions
  • lead to better payment terms, such as extended payment periods or discounts, from suppliers, thus improving the company’s cash flow and overall financial flexibility
  • result in lower insurance premiums, as it indicates a lower risk of defaulting on payments
  • increase the likelihood of approval for lease agreements and may even lead to more favorable lease terms
  • instill confidence in partners and facilitate mutually beneficial business relationships
  • make it easier to secure the financing necessary to fuel growth initiatives

Overall, a business credit score plays a crucial role in determining a company’s financial standing and can impact various aspects of its operations, from securing financing to establishing favorable business relationships and facilitating growth opportunities.

What is a good business credit score?

While the three main business credit bureaus use different scales to assess what is considered a good business credit score, for scoring models with ranges of 1-100, scores higher than 80 typically indicate low risk:3

  • “Low credit risk” is an 80–100 business credit score
  • “Medium credit risk” is a 50–79 business credit score
  • “High credi risk” is a 1-49 business credit score

How to establish and build business credit

Business owners who understand how to establish and build business credit can make strategic decisions to minimize guesswork and build up their business credit as soon as possible.

To start building business credit, a company must establish itself as a separate legal entity, such as a corporation or LLC, and apply for an Employer Identification Number (EIN) from the Internal Revenue Service.

Similarly to how your Social Security Number is used to track your personal credit history, the EIN is used to track your business’s financial transactions and creditworthiness.

Step 2: Open a business checking account

Once your business is legally formed and operating, the next step is to open a business checking account under the business’s name and EIN. While having a business checking account is not a strict requirement for building business credit, it is a best practice that can support your efforts to establish and maintain a strong credit profile for your business.

A business checking account helps separate your business finances from your personal finances, providing clear documentation of business transactions, including income and expenses. This documentation can be valuable when applying for business credit or loans, as lenders may request bank statements to assess your financial stability.

Step 3: Establish business lines of credit

Now, it’s time to add to your business credit profile. Small businesses can establish business lines of credit by applying for business credit cards and working with vendors who report payments to the business credit bureaus.

Keep in mind that not all vendors report payment information to the business credit bureaus. If you’re eager to build your business credit, you may want to ask any potential vendors or suppliers if they report to the business credit bureaus, what exactly they report, and how often. For example, a vendor may only report payment information to the business credit bureaus once a year, for amounts over $50,000.

Using a business line of credit responsibly, such as making timely payments and managing credit utilization, helps small businesses establish a positive credit history. This, in turn, strengthens their business credit profile and increases their credibility with lenders and suppliers.

Business credit vs personal credit

When it comes to business credit vs personal credit, it’s important to know that while they sound similar, they serve two distinctly different purposes.

A personal credit score reflects an individual’s financial history and is used by lenders to assess the risk associated with personal loans, mortgages, and consumer credit. On the other hand, a business credit score reflects the financial history and creditworthiness of a business and helps lenders, suppliers, and other stakeholders gauge the financial risk associated with potentially working with that business.

Does personal credit affect business credit?

While a decrease in your personal credit score won’t trigger a decrease in your business credit score, there are other ways that your personal credit can affect your business credit, especially for new businesses.

In the early stages, startups often lack an established credit history, making it challenging to secure financing solely based on the business’s financial track record. In such cases, lenders frequently turn to the personal credit of the business owner(s) as a primary factor in assessing creditworthiness. Additionally, some lenders may require personal guarantees or co-signing from business owners, effectively linking personal and business credit.

As the business grows and develops its own credit profile, the reliance on personal credit may diminish, but in the initial stages, it often plays a pivotal role in securing essential financing for startup ventures.

Build business credit fast

While there are some steps to building business credit fast, like setting up an employer identification number, others require patience, like paying your company’s bills on time and establishing a positive payment history.

It’s important to remember that building strong business credit takes time and consistent effort. Be patient and stay focused on practicing good credit habits to achieve your credit goals.

Bottom line

Building and maintaining good business credit is essential for every small business owner. With a high score, it’ll be easier to borrow money when you need it, get the most advantageous rates for loans and credit cards, and qualify for contracts with organizations that make credit scores part of their approval process.

  3. Federal Reserve