Benefits of a Good Business Credit Score

What is Business Credit?

A business credit score is a numerical representation of a company’s creditworthiness, which funders, lenders, suppliers, and other business partners may use to evaluate the financial stability and risk associated with extending credit or doing business with that company. Business credit scores are calculated by business credit bureaus such as Experian, Equifax, and Dun & Bradstreet, using various factors like payment history, credit utilization, company size, and industry risk.

A good business credit score varies depending on the scoring model used by each credit bureau. For instance, Dun & Bradstreet’s Paydex score ranges from 0 to 100, with a score of 80 or above considered good. Experian’s Intelliscore Plus ranges from 1 to 100, with a score of 76 or higher being viewed as a low credit risk. FICO’s Small Business Scoring Service (SBSS) ranges from 0 to 300, and a score of 160 or higher is generally considered good.

The Benefits of Good Business Credit

Access to Financing

A good business credit score demonstrates that your business is creditworthy and responsible with its financial obligations. As a result, lenders, such as banks and credit unions, are more likely to approve your business loan applications, giving you access to a wide range of financing options to support your business’s growth. These options can include small business loans, lines of credit, and business credit cards. With a strong credit history, you may also qualify for financing through the Small Business Administration (SBA), which offers various loan programs designed to help small businesses succeed.

Of course, businesses with bad credit are not without options. While credit scores are helpful when determining an applicant’s ability to pay back a loan product, Merchant Cash Advances (MCAs) are based on future revenue, meaning the MCA provider is purchasing a percent of your company’s future receivables. In exchange, you get access to future revenue immediately. But unlike a loan which often consider credit scores to determine your ability to pay, MCA funders are looking at a company’s receivables or past revenue to see trends. So if you don’t have a good business credit score, you can explore this option instead. Companies like The LCF Group only complete soft credit pulls and credit scores are not key in funding decisions.

Lower Interest Rates

Having a high business credit score can lead to lower interest rates on business loans and lines of credit. Credit scores are used to assess the risk associated with providing money to a business. A high credit score indicates that your business is a low-risk borrower, and as a result, funders may offer you more favorable interest rates. Lower interest rates can save your business a significant amount of money in the long run, allowing you to invest more in your business’s growth and development.

Higher Credit Limits

A good business credit score can also result in higher credit limits on business credit cards and lines of credit. Credit limits are determined by factors such as your creditworthiness, credit history, and cash flow. A high credit score demonstrates that your business is financially stable and can manage credit responsibly. Banks are more likely to extend higher credit limits to businesses with good credit scores, providing you with more working capital to cover business expenses and invest in growth opportunities.

Improved Cash Flow

Maintaining a high business credit score can lead to better cash flow management. With access to more financing options and higher credit limits, your business will have the necessary funds to cover expenses and maintain a healthy cash flow.

But what happens if you are a small businesses that experiences seasonal fluctuations or unexpected expenses? First, having a strong business credit profile can help you negotiate better payment terms with suppliers, further improving your cash flow management. But if your suppliers won’t work with you or you have an opportunity or unexpected expense that requires extra cash flow, again, it’s best to consider alternative financing like an MCA which looks at funding as a partnership because when your company succeeds, so does the funder.

Separation of Personal and Business Finances

You can separate your personal finances and business finances by building and maintaining a good business credit score. This separation is crucial for protecting your personal assets and credit score from any potential business liabilities. That separation also helps establish your business as a separate legal entity, making it more attractive to potential investors and partners. It can also prevent funders from requesting a personal guarantee on a business loan.

By separating your personal and business finances, you can more accurately track your business expenses, making it easier to manage your business’s financial health and plan for the future.

How to Build and Maintain a Good Business Credit Score

Building and maintaining a good business credit score requires a proactive approach. To build business credit, you’ll need to take specific action to improve the metrics used by credit reporting agencies to assign your company’s credit rating.

1. Establish a business identity: To build a strong business credit score, you must first establish your business as a separate legal entity, such as a corporation or limited liability company (LLC). Obtain an Employer Identification Number (EIN) from the IRS, which serves as your business’s unique tax identification number.

2. Register with credit bureaus: Once your business is established, register with the major business credit bureaus – Experian, Equifax, and Dun & Bradstreet. This will enable these bureaus to track your business’s credit history and create a credit profile.

3. Open a business bank account: Keep your personal and finances separate by opening a business account. This makes tracking your business expenses easier and demonstrates that you are serious about maintaining a professional financial presence.

4. Obtain business credit cards and lines of credit: Apply for business cards and lines of credit to establish your business’s credit history. Make sure to choose cards and credit lines that report to the major credit bureaus to ensure your positive payment history is reflected in your credit profile.

5. Pay bills on time: One of the most significant factors influencing your business credit score is your payment history. Late payments bring your credit down massively. Make sure to pay all your bills on time, including utility bills, lease or mortgage payments, and credit card bills. Consistent, timely payments demonstrate your business’s reliability and creditworthiness.

6. Monitor your small business credit report: Regularly review your business credit report from each major credit bureau. Check for any inaccuracies in public records along with any discrepancies and promptly report them to the respective credit bureau. Monitoring your credit report will help you stay on top of your business’s credit health and address any potential issues before they impact your score.

7. Maintain a low credit utilization ratio: Credit utilization refers to the percentage of your available credit that you are currently using. A low credit utilization ratio demonstrates responsible credit management. Aim to keep your credit utilization below 30% to build a higher score.

8. Limit credit inquiries: Each time your credit credit is checked, it can result in a hard inquiry on your credit report, which may temporarily lower your credit score. Limit the number of credit inquiries by only applying for credit when necessary and carefully researching your options before submitting an application. And remember, most MCAs do not utilize a hard credit pull so this might be a good option for those trying to keep down inquiries.

9. Establish trade credit with suppliers: Developing a strong payment history with suppliers can also positively impact your business credit score. Trade credit, or supplier credit, is an arrangement in which a supplier allows you to purchase goods or services on credit and pay for them at a later date. Ensure that your suppliers report your payment history to the credit bureaus to help build your credit profile.

10. Diversify your credit portfolio: Having a mix of different types of credit, such as credit cards, lines of credit, and term loans, can demonstrate that you can manage various forms of credit responsibly. While it’s essential not to overextend yourself, diversifying your credit portfolio can contribute to a strong business credit score.

Conclusion

A good business credit score can provide a range of benefits for small business owners, from access to better financing options to improved supplier relationships. But even those without great business credit scores have options in the alternative funding space.