Small business owners may not be aware that lenders and creditors make funding decisions using your business credit score, not just your personal credit score.
If you’ve ever considered outside funding for your business, you know there can be a seemingly unending list of information lenders might require. You’ll likely need your bank statements, income tax returns, profit and loss (P&L) statement, personal credit score, and more. But there’s something else that lenders and creditors can look at that may be affecting your chances: your business credit score.
Business credit scores are similar to personal credit scores, but instead of evaluating an individual’s creditworthiness, they evaluate the creditworthiness of your company. Business credit reporting agencies and databases collect information about payments made in the name of your business to create a business credit score. If you have a business credit card or any form of credit in the name of your business, then chances are your business has scores.
Lenders can review your business’ credit scores at any time, without your permission or without notifying you before or after the fact.
That means when you apply for trade credit or financing for your company, your business credit score may have an effect on your approval chances, and you might not even know that it’s affecting you.
Here are a few things to consider about business credit before you look for funding:
Know Your Company’s Scores & How You Can Improve Them
Business owners can use this resource to look up their business credit scores. Make sure you check for any errors— one in four business owners who check their business credit scores find errors that are bringing down their score. If you do find an error, Nav’s free CreditSweeper tool can help you dispute the mistake.
No errors? Your score may also be low if your business does not have sufficient credit history, or if you have judgements, liens or other derogatory information. You can improve your business credit scores by making on-time payments and reducing debt, among other options.
Your Business Has Multiple Scores—Know How They Are Used
There are three main business credit scores: Experian’s Intelliscore PlusSM, the Dun & Bradstreet PAYDEX score, and the FICO® LiquidCredit® Small Business Scoring Service℠ (FICO SBSS). Each provider has a different algorithm for calculating these scores, and scores may be customized for different purposes.
Depending on what type of financing you are looking for, any and all of these scores might be important to you. Dun & Bradstreet’s PAYDEX score takes into account your payment history and is primarily used by suppliers and vendors to judge your business when determining what terms to extend on trade credit (net 30, net 60, etc.).
Experian’s Intelliscore Plus takes a multitude of factors into account: your business’ payment history, percentage of available credit, and company information such as years in business and your SIC code. The business owner’s personal credit scores may be a factor as well.
FICO’s small business credit score typically analyzes the owner’s personal credit information plus the business’ financial information, and is dynamic in the sense that banks and lenders can put more weight on certain factors and less on others. The Small Business Administration (SBA) requires the use of the FICO SBSS in their pre-screening process for certain term loans, lines of credit and commercial loans up to $350,000. The minimum score to pass the SBA’s pre-screen process is currently 140 out of 300.
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