Business Credit Explained: What You Need to Know

Building and maintaining strong business credit is crucial for securing financing, negotiating better terms with vendors, and managing your company’s financial health. Unlike personal credit, business credit reflects your business’s reliability and creditworthiness to lenders and suppliers. This guide covers everything you need to know about establishing, building, and using business credit to help your business thrive, from understanding its importance to maintaining a positive credit history.

Why is a Business Credit Important?

The significance of maintaining good business credit is reflected in several aspects of a company’s operations, from securing favorable trade credit terms to accessing financing for business growth.

Dependability and Trustworthiness

Maintaining strong business credit is essential because it signals your company’s reliability. Vendors, lenders, and partners look at your business credit to determine if they can trust your company to meet financial obligations. A strong credit profile reassures them that your business is financially stable.

Better Financing Opportunities

Lenders heavily rely on your business credit to assess the risk of extending credit or loans. A strong credit profile helps you access better loan terms, such as lower interest rates, higher credit limits, and favorable repayment schedules. This can be crucial when expanding your business, upgrading equipment, or managing cash flow during lean periods.

Improved Trade Credit Terms

Suppliers use business credit to evaluate whether to extend trade credit. With a healthy credit profile, you’re more likely to receive extended payment terms, which can help streamline your cash flow and reduce operational costs. For example, a supplier might offer a business with strong credit 30-day or even 60-day payment terms, allowing you to preserve capital for other needs.

Increased Business Valuation

Strong business credit contributes to your company’s overall valuation. In situations like mergers, acquisitions, or sales of the business, potential buyers or partners will assess your credit profile to determine financial stability. A strong credit history can lead to a higher valuation, as it demonstrates that the company is well-managed and financially sound.

Business Credit Score Calculation and Factors

The calculation involves a combination of several factors, each accounting for a different percentage of the overall score. By knowing what goes into the calculation, you can take steps to improve it and increase your chances of securing better loan terms, lower interest rates, and more favorable trade credit terms.

How it’s Calculated

A business credit score is calculated based on a combination of several factors, including:

• Payment History (35-50%): Payment history is one of the most crucial aspects of your score. It considers the punctuality and consistency of your past credit payments. A good payment history demonstrates your ability to manage debt responsibly and makes you a more attractive borrower to lenders.
• Credit Utilization Ratio (30%): Your credit utilization ratio refers to the amount of credit you’re using against your credit limit. Maintaining a low credit utilization ratio, under 30% ideally, suggests better credit management and a lower risk of default.
• Length of Credit History (15%): Longer credit history can be beneficial as it provides more data about your payment habits. A longer credit history can also indicate stability and reliability.
• Credit Mix and New Credit Activity (10%): Credit mix refers to the diversity of your credit accounts. It could include credit cards, commercial loans, and lines of credit. A diverse credit mix demonstrates your ability to manage different types of credit responsibly.
• Company Information (5%): Lenders want to know the type of business seeking credit. Company information, such as the business’s size, industry, and structure, factors into this aspect of your credit score.

Business Credit Score Ranges

Business credit scores typically range from 0 to 100, with higher scores indicating a better credit history. Here are some general guidelines on the ranges:

• Excellent: 90-100
• Good: 80-89
• Fair: 70-79
• Poor: 60-69
• Bad: Below 60

How to Check Your Business Credit Score

To gauge the financial reputation and reliability of your business, lenders, suppliers, and other stakeholders often assess your business credit score. Multiple platforms perform this task, such as Dun & Bradstreet, Experian, and Equifax. Each one follows different scoring models and scales, which may yield marginally different results. However, checking your business credit score across these platforms offers a comprehensive understanding of your credit status.

The following is a step-by-step guide to checking your business credit score:

1. Identify the Credit Bureaus: The first step involves identifying the right credit bureau based on your business needs and the kind of information they provide. Not all bureaus operate on the same scoring scale or use the same criteria. Therefore, choose your bureau wisely.
2. Create an Account: Most bureaus require you to create an account and sign up for their services. For some, this may involve a fee.
3. Request a Report: After signing up, you can request a credit report for your business. These reports include all the details impacting your business credit score.

What is a Good Business Credit Score?

A good business credit score varies depending on the credit bureau and the type of score used. Here’s a breakdown of the different scores used by each credit bureau:

• Dun & Bradstreet:
  • Paydex score (1-100): Scores of 80 or higher are considered low risk, scores of 50-79 indicate moderate risk, and lower scores equal high risk of late payment.
  • Failure score (1,001-1,875): A lower score translates to a higher risk for bankruptcy or business closure within 12 months.
  • Delinquency score (1-5): A lower score is better because it equals lower risk for seriously late payment (91-plus days) or bankruptcy.
• Equifax
  • Payment index (0-100): Reflects past payment history. A higher score is better, with 90 or higher indicating bills paid on time.
  • Credit risk score (101-992): Assesses the likelihood of your business becoming severely delinquent on payments. A higher score translates to a lower risk.
  • Business failure score (1,000-1,880): Measures the likelihood of your business closing within a 12-month period. A lower score equals a higher probability of business failure.
• Experian
  • Business credit score (1-100): The higher the score, the lower the risk of serious payment delinquencies.
  • Financial stability risk rating (1-5): A lower score is better because it represents a lower risk for default or bankruptcy in the next 12 months.

How to Improve Your Business Credit

Improving your overall business credit strengthens your ability to secure financing, negotiate better terms with suppliers, and manage cash flow. By following these strategies, you can enhance both your business credit profile and score, opening up new opportunities for growth.

Establish and Maintain a Good Payment History

Building a solid payment history is crucial for a high business credit score, accounting for 35% of the score according to several business credit bureaus. Here’s how you can ensure positive payment behavior:

• Make sure to pay your bills on time. If possible, consider early payments.
• Manage your company’s cash flow to avoid late payments.
• Establish payment relationships with vendors that report to business credit bureaus.

Keep Your Credit Utilization Low

Proper credit usage is crucial as it can reflect your ability to manage debt effectively, accounting for approximately 30% of your total score. Here is what you can do:

• Monitor your balances and keep them within manageable limits.
• Aim to keep your credit utilization ratio below 30%.

Industry benchmarks suggest that a credit utilization ratio below 30% is acceptable for most businesses. However, this may vary depending on your industry and business type.

Diversify Your Credit Mix

Having a variety of credit types (trade credit, business loans, business credit cards, etc.) could potentially contribute to 15% of your score, illustrating to lenders that your business can manage different forms of credit.

• Apply for various types of credit as your business grows.
• Responsibly manage each type of credit to reinforce a positive credit history.

Maintain a Good Business Credit History

Having years of good credit history could account for another 15% of your score. The longer your credit history, the more reliably lenders can assess your business’ credit-worthiness.

• Keep old credit accounts open, even if you don’t actively use them.
• Consistently apply for and use credit over the lifespan of your business.

Regularly Monitor Your Score

According to research from Manta and Nav, 72% of business owners are unaware of their business credit score. Regularly reviewing your business credit report could help you catch any irregularities or inaccuracies.

• Request your business credit report from credit reporting agencies and review it for accuracy.
• If you spot any errors, report them immediately to the relevant credit bureau.

Regular improvement and maintenance of your business credit score take time and effort. By following these methods and staying on top of your credit report, you can set your business on the right path and potentially afford yourself better opportunities for growth.

Additional Uses For Business Credit

Beyond securing loans, attracting investors, and negotiating with suppliers, business credit plays a crucial role in many other aspects of running a company.

Business-to-Business (B2B) Transactions

Business credit can impact a company’s ability to secure favorable payment terms with other businesses. A high credit score can indicate to potential partners that your business is a reliable and trustworthy partner, leading to better collaboration opportunities.

Supply Chain Management

Business credit can also affect a company’s position in the supply chain. Suppliers and manufacturers may use the scores to evaluate the creditworthiness of potential partners, and a higher score can give your business a competitive edge.

Mergers and Acquisitions

When considering mergers and acquisitions, business credit plays a significant role in the due diligence process. A high score can indicate a well-managed business, making it a more attractive target for acquisition or merger.

Government Contracts

Business credit can also impact a company’s ability to secure government contracts. A high score can demonstrate a company’s financial stability and responsibility, making it a more attractive candidate for government contracts.

Utility Deposits and Services

Utility companies, such as electricity and gas providers, may use business credit scores to determine the amount of deposit required for services. A high credit score can result in lower deposits or more favorable payment terms.

Credit Card and Loan Applications

Business credit scores can also affect a company’s ability to secure credit cards and loans from alternative lenders. A high score can lead to more favorable interest rates and terms.

By maintaining a strong business credit, you can unlock new opportunities and improve your company’s financial health.