How Do Business Credit Scores Work?
We’ve all heard the cliche – “It takes money to make money.” Now, this isn’t always true, as anyone can start a side hustle these days. But, if you have any ambitions to grow, you’ll eventually need to borrow.
Sadly, it isn’t as simple as going to a lender. Before they agree to loan you money, they’ll need to perform a risk assessment. Of the metrics they use, your business credit score is one of the strongest.
Not familiar with business credit scores? In this guide, we’ll brief you on how business credit scores work, as well as ways to build up business credit.
What is a Credit Score?
In a nutshell, a credit score gauges the trustworthiness of a borrower. But, before 1956, most borrowers seeking capital had to put up collateral.
Thankfully, modern lending has progressed a great deal since then. Since 1956, FICO scores (AKA a credit score) have made unsecured loans possible. This measure ranges from 350-800 – the higher the number, the lower the risk an entity poses.
But, how are credit scores calculated? For starters, credit agencies continually monitor any accounts you have. These include accounts with utility companies, auto dealers, credit card issuers, etc. As long as you make consistent payments, all is well. But, if you miss payments, your score will suffer. Also, you may be wondering, “does checking credit score affect it?” If you do too many hard pulls, yes (more on this later).
Other factors that impact credit scores include credit utilization, number of accounts, length of credit history, and inquiries.
How Business Credit Scores Work vs. Consumer Credit Scores
Familiar with FICO scores? Before you think that’s how business credit scores work, hold up. As an entrepreneur, be aware that credit agencies use a different metric to evaluate businesses.
Unlike consumer credit scores, business credit scores range from 0-100. On this scale, anything above 80 is considered a good score. Like FICO scores, monitoring agencies base theirs on the consistency of bill payments, the utilization of debt, etc.
However, some factors are unique to business credit scores. For instance, the company’s sector matters, as does its size. Also, legal issues can also influence this metric.
Like consumer credit scores, a bad business credit score can make a firm’s life difficult. It can limit options to loans with higher interest rates. On top of this, low business credit scores can influence B2B transactions. Businesses wary of deadbeat clients may decline to deal with bad credit companies, or they may request payment upfront.
By learning ways to build up business credit, you can avoid this scenario.
How Can I Check My Company’s Credit Score?
Not every business makes good on their financial obligations. To protect themselves, savvy owners check the business credit scores of potential suppliers, vendors, and partners. If you’ve had struggles collaborating with other firms, it helps to know where you stand.
In America, numerous agencies monitor business credit. However, three stand above the crowd – Dunn & Bradstreet, Experian, and Equifax. Each has unique strengths – for example, Dunn & Bradstreet looks more at trade data (e.g., bills between businesses), while Equifax hones in on bank data (e.g., lines of credit).
Usually, pulling business credit scores will cost you money. However, there is a way to do it for free. By creating an account with Nav, a Utah-based fintech firm, you can access your D&B Paydex score and your Experian score for free. Other options (like CreditSignal) tell you when your scores changes, BUT they won’t reveal it.
Beyond that, you’ll have to pay. Dunn & Bradstreet’s CreditBuilder Plus service gives you unlimited access to your score, but it costs $149 per month. Equifax Business charges $99.99 one-time, or $399.95 for five checks. Of all the options, Experian offers the best value – $39.95 one-time, or $179/year for unlimited checks.
Asking for a Soft Credit Pull
As your business interacts with outside vendors and lenders, they may request credit checks. But, does checking credit score affect it? Just as with personal credit scores, hard pulls can impact business scores. So, before green-lighting a credit check, request a soft credit pull.
What’s the difference? The first is in the detail – soft credit pulls produce a thumbnail sketch of a businesses’ creditworthiness, while hard ones offer a fully-detailed report. The second difference is the effect it has on your score. Soft pulls do nothing, while too many hard pulls can hurt it.
Why is that? Soft credit reports only contain your business credit score, plus a few other statistics. Hard pulls produce your full credit report.
How much does a hard pull affect your credit score? The odd hard pull does nothing, but if credit monitoring agencies see too many over a given period, they’ll assume you’re in poor financial shape. Once you cross a credit agency’s “red line”, you may lose several points per hard pull.
So, anytime a business partner requests a credit check, ask for a soft pull. They won’t always comply, but the fewer hard pulls on your record, the better off you’ll be. Remember – a soft pull credit score is a healthy credit score.
How do I Build Up a Good Business Credit Score?
If you want to qualify for the best business loans, you’ll need a good business credit score. So, how should you go about it? Below, we’ll show you ways to build up business credit:
- Establish your current position – Do a soft pull on your credit. But, what if your search doesn’t return a score? Then, you’ll have to establish one. Start by either incorporating or getting an LLC for your company. Next, get an EIN, or an Employer Identification Number from the IRS. After that, ensure you’ve attached your legal business name to your business bank account and phone number. Finally, apply for a D-U-N-S number from Dunn & Bradstreet. Once you’ve done all this, remain in good standing with your clients, suppliers, and lenders. Within a few months, you should be assigned a score.
- Get a business credit card – Stop doing business with your personal credit card. Now that you have an incorporated business, get a card in its name. Run all business-related transactions through this card, and you’ll build a credit history fast. Also, doing this makes it easy to highlight deductions at tax time.
- Work with vendors that report payments – If you buy through a vendor, but they don’t report the transaction, did it even really happen? Ensure that they do, as this will further build your creditworthiness.
- Pay your clients early – Having a perfect record of paying on time will give you a great score. But, to get the best Paydex score from D&B, you need to pay bills before they are due. Do this regularly, and watch that Paydex score surge.
- Do soft credit pulls quarterly – What good is a business credit score if you don’t know it? Credit report mistakes (and sadly, fraud) can negatively affect your score. If you don’t check, you’ll never know. By checking every quarter, you can catch and report any irregularities.
For Better or Worse, You’ll Eventually Need to Borrow Money. To grow, you’ll need capital. Crowdsourcing is awesome, but banks and private lenders are still the most significant source of financing out there, and even online lenders like OnDeck insist on FICO score 600 or better. To get loans with the most generous terms available, you’ll need a top-flight credit score. Use the info in this guide, and you’ll get there sooner than you think.