Key Things to Know About Your Business Credit Score

Your company's creditworthiness is calculated by the credit bureaus and represented by your business credit score. They use the information on your company credit report to generate the score, and lenders rely on this information when evaluating your credit application to forecast how likely you are to repay them on time. A higher score indicates that your company has a track record of paying payments on time.

What is the difference between a business credit score and a personal credit score?

Most entrepreneurs are familiar with the FICO score, a predictive analysis method utilized in personal credit. How does this compare to a credit score for a business?

While both credit scoring models serve the same objective, they are fundamentally different and require different inputs. Your personal score is linked to your social security number and only represents your individual creditworthiness. Your business credit score is linked to your employer identification number (EIN) or tax ID number. 

A firm can have several corporate credit ratings, just as you can have multiple personal credit scores. There are many different credit scoring algorithms and companies, so businesses and individuals alike can have more than one score. 

Who calculates credit scores for small businesses?

Experian, Equifax, and Dun & Bradstreet are the three major providers of small company credit scores. Experian and Equifax are two of the most well-known names in personal credit scoring, so most individuals are familiar with them already. Dun & Bradstreet has established a solid reputation in the business credit score sector and provides a few distinctive ratings for small business credit files. PayNet, which is owned by Equifax, also offers corporate credit scores based on a proprietary database containing various parameters.

How do they calculate a credit score for a small business? 

When generating a small company credit score, the companies take a range of input parameters into account. Each credit bureau uses its own formula to calculate a small company credit score, so your score may vary across the bureaus. 

All models analyze historical information to provide anywhere from three to six different ratings to indicate your company's financial credibility. These ratings are based on your company's payment history, revolving credit card history, vendor invoices, and public records (including tax liens and bankruptcies).

How to Build Business Credit in 5 Simple Steps 

For both new and established small business owners, figuring out how to get business funding and credit should be a priority. Establishing a solid business credit profile with different accounts early on can help make your present and future business plans successful.

Establishing business credit is not difficult, but it does require preparation and strategy. Building your business credit will be much easier if you get a head start and begin early. 

1. Form an entity for business

In the early phases of a firm, it's usual for the owner to mix their assets with the companies. However, this makes it challenging to create the company as a separate organization. The business is officially established when incorporated or formed as a limited liability company (LLC). Consider forming a corporation or LLC, if you have not already. Doing so can help you efficiently separate your personal and corporate credit profiles and financials.

1. Submit an employer identification number (EIN) application

After you have formed your corporation or limited liability company, you can apply for a free federal Employer Identification Number (EIN). An EIN is a tax-reporting identity for your company, and it is the equivalent of a social security number for your business. You will need one to convert your company to a corporation, open a bank account in your company's name, and acquire commercial contracts.

1. Get a business bank account

You can open a business account once you get your Articles of Incorporation and an EIN. A business account is available at almost every bank. Corporate bank accounts often have higher costs than personal accounts, so it is best to research and compare what different banks charge for keeping them open.

1. Get a credit card for your business

Establishing business credit with a business credit card that reports to the major commercial credit reporting agencies is a terrific way to get started. You should open at least one business card, but having more can be beneficial.

1. Begin the process of establishing business credit

It's time to start building your company's credit history now that you've taken steps to establish an official business entity and the credit bureaus are tracking your company. Establishing trade lines is one of the easiest and most successful methods.

As a newly created startup or an existing business with little to no credit history, you can obtain numerous fundamental types of business credit.

• Vendor Credit: When an individual or business offers products or services that your firm can acquire on a short-term basis, this is known as vendor credit (typically net 30 terms). Many vendors are willing to give loans to companies that meet specific criteria. A merchant may require an initial purchase or deposit before granting credit terms in some instances.

• Supplier Credit: When a supplier is ready to give supplies to your company while deferring payment until a later date, this is known as supplier credit. A relationship with industry-relevant vendors or suppliers is worth its weight in gold in the world of business. The better your connection is, the less likely you are to pay for goods or services in advance. You can start building a positive business credit history by securing payment terms like net-60 or net-90 with just a few (3-5) vendors or suppliers who record payments to business credit reporting agencies. This financing is advantageous for cash flow management since it allows you to sell the things you receive from the supplier before paying for them.

• Retail Credit: Many merchants provide business credit cards. You can only use the card in a particular retailer unless it is co-branded. If you have a specialized store where you make business purchases regularly, this form of business credit may make sense.

• Service Credit: Service credit is the most accessible business credit to establish for the first time. Your institution enters into agreements with providers for internet, cell phone, cable, satellite TV, web hosting, and other utility services.

• Credit Cards for Businesses: A secured or unsecured business credit card is one of the most crucial tools for keeping your personal and company spending separate. You must apply for a business credit card that only reports to company credit bureaus to safeguard your credit.

Once you have established some credit, ensure that you make your payments on time. Without a doubt, this is the golden rule in any credit situation. Paying your bills on time demonstrates that you are dependable and capable of managing (and repaying) your debt. A history of late payments, particularly seriously delinquent payments, will lower your business credit rating and harm your credit profile.

PayNet helps commercial finance, banking, and alternative lenders make better decisions by leveraging the aggregate power of commercial lending data. The company developed the tool to provide better solutions for small business lending. We are still at it today and trying to provide commercial loan data and insights that you won't find anywhere else.

As one of the few bureaus that offer company credit scores, you may come across PayNet while learning about and building your score. 

Bottom Line

Understanding and building your company’s credit score is a vital step to maintaining strong finances. With a better score, you may receive better loan terms. 

Here at Equify Financial, we are committed to helping you succeed. Our team of seasoned financial experts will work with you to understand the factors impacting your company credit score and identify solutions you can take to improve it. 

As a leading financing provider, we understand the importance of your company’s credit score. Our financing experts will work with you throughout the process of establishing your business’ financial goals, developing a plan of action, and creating custom financing options. 

We are ready to assist you in whatever way possible. Do not hesitate to reach out today!