You're probably already familiar with the basics of a personal credit score (or FICO). As a refresher, this number will range between 300 and 850. You will incur a lower score if you don't pay bills on time – these could be credit card payments, utility bills, loan balances or something else. This may negatively impact your ability to borrow money in the future.
A business credit score works much the same way, but with a few notable distinctions. Before diving into the deep end of business credit, let's get our feet wet with some of the basics:
What exactly is a business credit score?
A business credit score, like a personal credit score, is a grading scale that lenders use to determine the risk involved with financing a business loan. This score will fall somewhere on a scale 0 to 100, according to NerdWallet. The ideal credit score will be somewhere between 80 and 100. A business that's within this range will be considered less likely to make a late payment, which makes them a low-risk borrower. Any score between 50 and 79 is more of a gray area. Businesses with a score on the higher end of that range may be more likely to get a loan than one that has a score of 50. Any business with a score below 50 is considered to be at high risk of making late payments, and may therefore find it difficult to qualify for a loan.
How is the credit score determined?
Every business should ideally have its own tax ID that is separate from the tax ID of the owner. According to Entrepreneur contributor Asheesh Advani, this is especially important for anyone who has a damaged personal credit score. This is because any data that is tied to that ID is what will ultimately be used to determine your credit score. These include payment habits, outstanding balances (i.e. on utility payments, loans, etc.), public records, business size, years in operation and various other factors. As such, it's important to keep personal accounts separate from business accounts wherever and whenever possible.
"You should consider getting a separate business address (not a post office box), a separate bank account, an official corporate name registered with local authorities and a separate telephone listing," Advani wrote. "While these administrative chores might seem minor, they are critical in distinguishing you from your business."
It's worth noting that some small lenders and banks may assess your personal credit score while they consider your business's candidacy for a loan. If you have relatively strong credit, this shouldn't be a problem; however, it the inverse is true, you may struggle as you apply for small business loans.
Who's keeping score here?
There are three primary credit bureaus that supply a business credit score: Dun & Bradstreet, Equifax and Experian. For personal credit reports, Dun & Bradstreet is substituted with TransUnion, and a free credit report is supplied every 12 months. Business reports, however, are never free. Dun & Bradstreet charges $61.99, Equifax charges $99.99, and Experian charges $36.95.
As mentioned before, each of the three scores will be accomplished through aggregation and analysis of business account data – payment habits, outstanding balances, etc. There will be some minor variation between the types of data that each of the three bureaus gather, which means that there may be some variation between the three scores.
How important is your business's credit score?
The answer here really depends. If, for instance, a business is sure that it will never rely on outside funding, then the company's credit score might not be terribly relevant. That said, a bad credit score is typically symptomatic of bad times – or just extreme irresponsibility – regardless of whether you're borrowing money.
However, if you are intending to take out a small business loan at some point, it's important to take actions that will boost your credit score, avoid mistakes that could damage it, and to check it once a year. A bad credit standing could influence your business's ability to borrow money when times are tough.
My business credit is bad and I need funding now. Is all hope lost?
The answer is no and you're not alone. There are plenty of businesses that find themselves between a rock and a hard place when the time comes to apply for extra funding. Likewise, there are a bevy of business loans for poor credit available. It's really just a matter of knowing where to look, and National Funding can point you in the right direction.
So while your credit score is important, having a bad one is not a death sentence for your company. There are still options that will help you keep your head above water.