When a business first opens, it starts without a credit history; this can make it more challenging for startups to get loans or credit cards. Timely payment performance and responsible use of credit products can make a business more attractive for suppliers extending trade credit terms or for lenders considering small businesses for financing offers.
How are business credit scores used?
Business credit ratings and scores can be used by trading partners, lenders, customers, and investors—anyone who’s interested in the viability of your business and whether to lend to or trade with you.
When you apply for a loan or credit, lenders may use your credit score in determining your “creditworthiness”—that is typically a representation of the lender’s belief in your ability to repay a loan or credit on time and in full. If you have a higher score, you’re generally considered to be more “creditworthy.” Although business credit scores are just one of the components that lenders consider when reviewing loan applications, your credit score usually weighs in their decision to approve or deny your loan.
“The strength of your business credit score not only impacts loan approval decisions, but it can also affect your loan amount and the interest rate that you are charged,” said Sink.
Business credit scores are also often used in determining trade credit. With trade credit, a supplier lets you purchase goods on credit and requires payment within some agreed-upon payment period. Suppliers are generally more likely to extend trade credit to businesses with good credit scores.
Business credit scores are determined by several factors. Three primary drivers include:
- Credit history: Like your personal credit score, business credit bureaus review your payment patterns, outstanding balances, and credit utilization ratio. They also look at your business’s debt and debt usage.
- Firmographic details: Credit bureaus consider specific details about your business, including how long you’ve been in business and the number of employees you have.
- Public records: Bankruptcies, judgments, and liens—all of which are public information—may be considered as part of your business’ credit score.
How can I monitor and track my business credit?
Unlike personal credit scores, business credit scores are publicly available; but there is a cost to access them. A low score can reflect poorly on your business; this can cause suppliers, investors, partners, and even customers to be cautious about doing business with you. Regularly monitoring your business credit scores (e.g., at least annually) can help you stay aware of any changes or other impacts that might require your attention.
Consumer credit reporting agencies like Experian and Equifax can also produce business credit reports. Dun & Bradstreet focuses on business credit reporting with multiple scores that address different aspects of your business. Those include: (1) PAYDEX business credit score (measures past payment performance), (2) Delinquency Predictor Score (measures the likelihood of late payments, bankruptcy, and future payment failure), and (3) Supplier Evaluation Risk (predicts the chance a supplier will become inactive or shut down in the next 12 months.footnoteDisclosure 2