How Business Credit Scores Work in the USA

Can a business survive without sufficient funding? Or can a business internally have all the funds it needs to perform its functions? The answer is a big NO! A business can’t stand alone, especially when it comes to finances. That’s why every business has to pay close attention to its credit score. A good credit score can give the business access to better funding as it develops.

In this article, we will cover everything about business credit scores in the United States of America, how to check business credit scores, and how to establish business credit for the first time, especially if you are a small business owner.

What is a business credit score?

What is a business credit score

A business credit score is a numerical value that points out whether or not a business qualifies for a loan. This score is also called a commercial credit score. It is usually calculated based on the loan repayment history of the business (also called a business credit history), any bankruptcy event, legal judgments, or tax liens. It is also calculated based on the length of the business’ operation, the type, and size of the business, and its performance when it comes to loan repayment, especially when compared to other businesses.

This score is what small business money lenders look out for before considering a business for a loan. They usually check for a few things (also called business credit report) that includes the company’s assets, profits, revenue, and liabilities. When collateral is involved, the lenders check for the value of the collateral (whether or not it can pay for the loan). Other times, the small business money lender needs the credit score of both the business and the owner person.

A good business credit score

Just having a commercial credit score isn’t enough. A business has to be conscious of maintaining a good and impressive business credit score. A business credit score range can go from 0 up to 100 (this is unlike consumer credit scores that are from 300 to 850).

Although there are different methods to credit score calculation, a business can generally attain a good business credit score if it keeps its credit history clean, pays taxes on time, runs away from legal complications, and avoids a lot of debts.

And just as there is a good credit score, there are also bad credit scores. This occurs when a business does the opposite of how to get a good credit score. A credit reporting agency is responsible for keeping all business (and consumer) credit reports. This is where lenders go when looking for a commercial credit report. And it includes all of a business credit history and information.

Benefits of a good business credit score.

A good corporate credit score interprets to easy access to financial support whenever needed, lower loan interest rates, and better trade credit. Lenders will not find it difficult to give out loans to businesses with a good credit score, because the lenders are guaranteed that the business will pay their loan back on time.

Likewise, loan terms tend to be more favorable with larger credit limits and lower interest rates. Lenders would also separate the business credit score from the business owner’s credit score. This way, the person can be sure that his credit is secure and any company debt is recorded on the business credit report alone.

Finally, a business with a good credit score would enjoy better business terms from suppliers. Everyone wants to work with a business that has no legal complications, pays its debt on time, pays taxes, and has no credit/bill unattended. The business overall looks more trustworthy, and growth is unstoppable.

How is business credit determined?

How Business Credit Scores Work in the USA

Business credit scores are determined using certain parameters. Some can be controlled and some can’t. These parameters include the following:

  1. Your business’ age: The longer a business has stood over time, the higher the business credit score. This is because a well-known business has been able to acquire a certain level of trust over time. And a business that is just starting up doesn’t have much to lose if they decide to go under the radar.
  2. Debts: The higher a company’s debts, the lower the business credit score. But immediately the debt is being paid the score goes up. The longer it takes for a company to pay its debt, the much longer the score stays down.
  3. Credits: Similar to debts, keeping credits unpaid for a long period increases the number of credits to be paid. Lenders see this as a business debt and therefore lead to a low credit score.
  4. The type and size of the business.

By now you may be wondering how does business credit work? Well, there are different methods to calculate business credit. But it mostly depends on the ranking system of different credit reporting agencies. Some agencies have a 3-rank rating system, while some have a 4-rank rating system. Some other reporting agencies have up to 5 ranks for rating commercial credit scores.

In a 3-rank rating system, the ranks are 0-49, 50-79, and 80-100 which are rated bad, fair, and good respectively. A credit score of 49 and less indicates that the company makes its payment 2 months or more after the due date. A credit score of 70 means that the business pays about 15 days after the due date while a score of 50 means that about a month (30 days) had passed before payment was made. A score of 80 means that payment was made on time and a score of 100 means the company pays even before the due date.

In a 5-rank rating system, the risk is calculated instead of trust. That means a score of 76-100 is tagged as a low risked business. While a business with a credit score between 1 and 10 is rated a high risked business. Although not common, some agencies have their scores range from 0 to 300 instead of 100. Here, a score higher than 140 can have access to a good loan with a high amount. Some banks lookout for a credit score of 160 and above.

How to check a business credit score?

Unlike a consumer credit score that can be accessed easily, a company might have to pay to access its credit score from a credit-reporting agency. There are three major credit reporting agencies in the United States of America. The amount required to order a single commercial credit report could range from about $30 to $100. And for a package, a business might spend up to $400. Also, some reporting agencies allow for a yearly subscription so that businesses can monitor their credit scores yearly.

Challenges with credit scores

As much as every business strives to get a good business credit score, it can be a little challenging to maintain for some reasons. The score doesn’t improve until the change has been maintained for a year or two. And start-up businesses (even if they have honest with their loan payments), don’t get a high credit score because of the age of the business. Finally, monitoring the scores yearly can be stressful, expensive, and time-consuming. But how can a company establish a good business credit score for the first time?

How to establish business credit?

How to establish business credit

Before establishing business credit, the business has to first complete a few foundational steps. The steps include structuring the business to become a separate legal entity. After this, the business owner has to apply for an employer identification number (also called tax identification number, TIN). This number is what is used to identify a business during tax and legal reporting events. The final foundational step is to apply for a credit loan in the name of the business.

For a start-up, there are only about five types of credit loans you can apply for to establish your business credit. They include the following:

  1. A business credit card: This is like applying for a personal credit card. Instead, the credit card details are in the name of the business alone.
  2. Vendor credit: This is when a business (or an individual) sells a product (or service) to your business, and payment is done on short-term financing.
  3. Service Credit: This credit happens when a business receives credit services from utility service providers. They include web hosting, cell phone, the internet, etc.
  4. Retail credit: This is simply purchasing goods on credit from a regularly patronized retail store
  5. Supplier credit: This is when a supplier provides goods and services to a business and defers the payment to a future date.

The more credit collected from suppliers, lenders, or banks, the more data inputted in your business’ credit report. And with regular on-time payment of credits and loans, the scores go higher, and then your business can enjoy the benefits of having a good business credit score.

Conclusion

In this article, we have looked at how a commercial credit score works and the importance of a good business credit score. Although it can be challenging to follow up on a good credit score, we have highlighted the steps on how to establish business credit for the first time. However, businesses have to be careful. A lot of scam websites offer free reports just to steal a business’s information. So, we advise business owners to always opt for direct sources of reporting agencies to avoid scams.