Why your business’ credit score is a big deal

Why your business’ credit score is a big deal

In the world of personal finance, everything revolves around your credit score. This simple number, a reflection of your financial habits over time, controls everything from your interest rates to your likelihood of receiving an affordable loan.

If you have a good credit score, it’s easier to accumulate and maintain wealth. Research indicates that individuals with a bad credit score end up paying almost $200,000 more for financial products and services over their lifetimes than those with good scores.

If you’re looking to succeed personally, it’s vital to be aware of and nurture your credit score. But did you know that credit scores are for more than just individuals? If you own a small business, you should be every bit as aware of your business credit score as your personal one.

What is a business credit score?

Conceptually, business credit scores are very similar to personal ones. In the same way that they monitor the spending habits of individuals, credit bureaus also gather information about businesses to gauge their trustworthiness, typically awarding them a score between 1-100.

Companies that pay their bills on time, defer high-risk activities and avoid too much debt are awarded high credit scores. Those who pursue risky courses of action or neglect paying bills get stuck with a low score, which makes it difficult to seek new rounds of investment or find low interest rates.

The minute you form a business, its credit score is born as well. Credit bureaus use public records to open files on all new businesses, and they’ll continue to track your company throughout its life.

Bureaus like Dun and Bradstreet, Equifax and Experian are the biggest players in business credit. If you aren’t familiar with your score, you can receive a report from any of these agencies.

How are business scores different from personal ones?

Fico takes five factors into account when generating your personal credit score:

  • Amounts owed
  • New credit
  • Length of credit history
  • Credit mix
  • Payment history

When it comes to business scores, there are a few more factors to consider:

  • Public records
  • Bankruptcy history
  • Your personal credit score
  • Company size
  • Your industry’s inherent risk level

Unlike your personal score, which is private, anyone can access your business credit score if they’re willing to pay for it. This means that potential investors can easily see your score, but also competitors and those with prurient interests, which makes it even more important to keep it high.

Fortunately, both business and personal credit scores can be improved by following good financial practices over time.

How to interpret your business credit score

Although there’s no hard-and-fast convention for scores, most bureaus use the 1-100 model. The numbers sometimes differ depending on which agency generates your credit report, but higher numbers always indicate higher trustworthiness, with the opposite also being true.

A score above 75 indicates that your business pays back bills on time—or early—and that you’ve done a good job avoiding risk. A high score like this is a vote of confidence from a credit bureau, which goes a long way toward presenting an attractive front toward potential investors.

A score between 50-75 indicates that your business may be dealing with some risk factors, but that by-and-large you’ve been reliable paying your bills. You may struggle to get good interest rates with a score in this range, but it’s not a fatal error – some simple changes should allow you to define and repair your credit.

A score below 50 indicates that credit bureaus see your business as a risk. It could be that you’ve neglected paying your bills, that you’re in a lot of debt, or that you’re in a very risky industry, but no matter what the cause, it’s not an ideal situation. DO what you can to improve your score.

Achieving and maintaining a healthy score

The secret to keeping a good business credit score is very similar to that for keeping a good personal score: be smart with your money. Don’t spend more than you earn. Pay your bills on time.

Most credit bureaus offer a service that allows you to constantly monitor your business credit score. This is preferable to checking it periodically, because your score can change quickly.

If you take care of your business credit score the same way you would your personal score, you’ll find it much easier to grow and maintain your business.

This post is part of our contributor series. It is written and published independently of TNW.

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