Maintaining a healthy credit score is crucial for the success of your small business. Fortunately, you can learn how to monitor your credit score and make business decisions that positively impact your credit report. To do that, you need to know how business credit scores work.
What Is A Business Credit Report?
A business credit report is simply a record of your history as a business borrower. Business-related obligations such as loans, mortgages, leases, credit cards, and lines of credit are all profiled in your report. It will also include credit consumer behaviors – opening and closing accounts, late and timely payments, and any currently unpaid bills. Serious credit problems such as defaults, charge-offs, judgments, bankruptcies, or liens are also included in your report.
There are 3 major business credit reporting agencies: Equifax Inc., Experian PLC, and Dun & Bradstreet. Each uses a slightly different algorithm to compute their credit scores, so a business lender may look at all 3 reports for a thorough analysis. That means you need to check all 3 scores, too.
What Is A Business Credit Score?
Your business credit score (also known as a FICO score) is a number calculated from the data listed in your credit report. This score is based on a complex algorithm designed to inform lenders of your credit-worthiness or riskiness, based on your borrowing history. While consumer credit scores range from a low of 300 (poor) to a high of 850 (excellent), business scores range from 0 to 100. A higher credit score can get you lower interest rates, which means you’ll have to pay out less total money over the lifespan of your loan.
Your credit score isn’t static – it will change over time as your financial history evolves. Factors that affect your score include:
- Outstanding balances
- Timely and delinquent payments
- Credit usage
- Total available credit
- Public records
- Business growth and structure
The credit bureaus’ algorithms are secret and the interaction between these variables is complicated, but certain factors and behaviors will affect your score in predictable ways.
Negative Impacts On Credit Scores
Any financial event that indicates that you’re a risky borrower will have a negative impact on your score. Some financial events will lower your score only slightly. For example, repaying your obligations slowly, keeping a large number of accounts open, and making late payments can all nudge that number down. Your credit will also take a small ding every time a potential lender checks your score.
More serious financial events will have a bigger impact. If you have accounts that go to collections, judgments against your business, liens placed on your assets, or property repossessed, your score may take a triple-digit hit. Bankruptcy will also cause a big drop.
Credit scores are weighted toward the most recent information, so the impact of a negative financial event will decrease over time. These negative events will impact your score less and less over time, until they fall off the report altogether. A bankruptcy will stay on your report for 9 years and 9 months, while judgments, tax liens, and collections will fall off after 6 years and 9 months. After that time, those items will no longer be reflected in your score.
Positive Impacts On Credit Scores
Avoiding black marks on your credit report isn’t enough – you also have to work hard to build up good credit. A consistent history of paying accounts on time will boost your credit score, as will lowering the balances you carry on any credit card or any open line of credit. Your business’s score will typically improve as it gets older, especially if your income is growing.
Monitoring Your Business Credit Score
Your business credit score is crucial for the success of your company and you should monitor it just like you do your business income. Checking your business credit report is easy – you can get it directly from each bureau’s website. You can also ask about your score anytime someone runs a credit check on your business (for a lease or loan, for example). You may be able to ask your bank; some will provide it for free while others will offer it as part of a more comprehensive credit advising package.
While you’re legally entitled to a free personal credit report each year from each of the consumer credit bureaus, you’ll have to pay for your business credit report. Your Experian report costs $36.95, your Dun & Bradstreet report costs $61.99, and your Equifax report costs $99.99.
You should check your report once a year, every year.
What To Do With Your Report
Once you have your credit report, what do you do with it? First, read through the whole thing and check it for accuracy. Compare it with your records to make sure every item has the correct amounts, dates, and other information. Lenders, creditors, and reporting bureaus all make mistakes in reporting, so it’s up to you to make sure your report is fair to your business.
If you find an error, you should report it to the bureaus immediately. You’ll need to send in supporting documentation to show that the information is incorrect and how it should be listed instead. Make sure to follow up with each bureau regularly to ensure that they’ve actually made the corrections – it can take a while for them to process your request and they don’t always make the right changes.
Other Useful Information On Your Report
Your credit report directly affects your ability to borrow money, but careful monitoring has other indirect benefits, too. For example, you can see who has made inquiries about your credit. You can evaluate the financial information shown in order to create a strategy to improve your score.
Monitoring your score is also a good way to keep an eye out for identity theft. You’ll be able to see where new accounts have been opened in your business’s name so you can shut down any illegitimate ones.
You already keep an eye on your business’s financials, but sometimes your credit report can help you see that information in a new way. Maybe you haven’t noticed how much of your available credit you use every month or that you have a pattern of pushing payments back to certain vendors. The report is a kind of annual checkup for your business. Be proactive about getting it, checking it for accuracy, and using the information in it to help your business grow.