Business Credit Scores: How Do They Work
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How Do I Check My Business Credit Score
June 29, 2021 byGuest
Both businesses and individual consumers have credit scores that reflect how theyve historically used credit. Lenders and others use these scores to help determine creditworthiness and make decisions based on what they see. Business credit scores are based on different information than personal credit scores and use a different scoring system.
Get Your Free Business Credit Check
Doing the right things to build your business credit profile is one of the most important items you can take as a small business owner. Doing so opens up financing opportunities and business relationships that make it a hell of a lot easier for you to run and grow a business.
Ready to see your credit data and start building better business credit? Check Your Personal and Business Credit For Free .
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Understanding The Impact Of Your Business Credit Score
As a small business, there will be times when you need to borrow money, or agree credit terms with your suppliers. You may want to take out a business loan, or negotiate a bank overdraft. Or you might want to secure improved credit with a supplier. But to do this, you need to be creditworthy so lenders and suppliers know you can repay them
This is where your credit score comes in:
Equifax Business Credit Risk Score Ranges
Equifax uses a very different range for its Business Credit Risk Scores. Rather than 1 to 100, youll get scored from 101 to 992, with 992 being the best score.
As with other business credit scores, your Equifax Business Credit Risk Score tries to assess how likely it is that youll be late on paymentsin this case, more than 90 days late in the next year.
Note that while Business Credit Risk Scores usually start at 101, you can get a 0. That only happens if your business has declared bankruptcy.
Unfortunately, Equifax doesnt publish specific ranges for its business credit tiersat least for now. But Equifax appears to be revamping its whole business credit suite, so well update this article if Equifax starts offering more specifics.
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Find Out If You Can Remove Items From Your Credit Report Speak To An Expert Today
Lets go back to that imaginary cancer patient. Say he survives the disease but has to take unpaid leave from his job to recover. Bills pile up in the meantime, and he has to apply for a new credit card and max out his spending limit, to stay afloat. As a result, his credit score drops significantly, and due to the high cost of chemotherapy and recovery, it stays low.
In situations like this, the researchers hypothesize, the data could help a company develop services that flag our imaginary patient as a candidate for targeted financial help, or subsidized health insurance plan like Medicaid.
Many people dont often understand the risk that theyre getting themselves into through various forms of borrowing, and how that all leads to progressively more catastrophic outcomes for them, says Matthew Harding, a Department of Economics professor at the University of California Irvine and the studys co-author. Peoples lives could potentially be made better by having some advanced information on things.
Theres another, more dystopian, implication to these findings, Harding says.
If a team of economics professors can predict how healthy you are based on your credit score, so can insurance companies. An industry with a bad reputation for using Big Data to drive rates higher could potentially make things like health care and life insurance even less affordable than they already are. Employers could also, theoretically, use this information to discriminate against employees.
How To Dispute Errors On Your Business Credit Reports
As with your personal credit scores, its important to check your business credit scores regularly, as the credit bureaus can make mistakes or have incorrect information on your reports.
Your business could get mixed up with that of another, which could mean negative information from another business is mixed with yours, Detweiler says. Or information such as UCC filings could be affecting your business credit and you dont know it.
Contacting the credit bureaus directly is the best way to resolve this type of discrepancy. If youre able to prove that their information is incorrect, they will adjust the reports accordingly.
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Equifax Business Credit Reports
Equifax is unique in that it assigns your company 3 different scores, inside of a single report. The first is a traditional credit risk score , which analyzes your companys credit history credit utilization, past delinquencies, length of credit history, and the like. Secondly, the Equifax report contains a “Payment Index” . This is a measure of your payment history to past creditors. A score of 90+ indicates that, on average, the company paid its bills on time.
Finally, Equifax issues a “Business Failure Score” , which asses the risk of a company going under and dissolving. In order to maintain a good score, your company should have an old financial account opened, suggesting it has been around for a long time.
Monitor Changes To Your Business Credit Score
Businesses that regularly monitor changes to their credit scores are able to identify potential issues faster and deal with problems that could affect the companys credit score. If you check your score only when you need funding, you may not be aware of significant negative changes that could hinder the funding process and take a long time to repair.
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Why Do I Need Business Credit
In many cases, you wont be able to complete business transactions if your business doesnt have credit. Lenders will use a businesss credit history when figuring out whether or not to loan the business money. Youll also need credit in order to get business insurance. In many instances, you wont be able to buy goods and services for your business without access to credit.
Why cant you use your personal credit for all of that? In some cases you can, but you really shouldnt. The IRS has strict rules about mixing personal and business expenses. Using personal checks or a personal credit card makes your bookkeeping much tougher. Most people also believe your business looks a lot more professional when you pay for business expenses with dedicated business funds.
Perhaps most importantly, if you use personal credit to run your business, you put yourself and your family at risk if your business fails or experiences money trouble. Creditors will then come after YOU, as you will be personally liable for the expenses incurred by the business.
Getting A Free Business Credit Report
If you dont want to pay a hefty fee to check your business credit score, you have a few alternative options. Here are five places where you can get a free business credit report:
1. CreditSignal
CreditSignal is a free business credit reporting service offered by Dun & Bradstreetâand for a while, it was the only place to get a free business credit report. If youve had bad credit in the past, this is a great tool to try out.
CreditSignal allows you to stay on top of your business credit and alerts you when anything changes with your score. Once you sign up, youâll have access to an online dashboard and mobile app to monitor whatâs going on with your business credit report. You can also choose to receive email alerts whenever anything changes with your score.
This being said, is not only one of the best places to find a free business credit report, itâs a great place to look for additional business credit resources. They offer a business credit education online center to learn about credit information specific to your industry or to receive advice on how to improve your business credit score based on your profile.
2. Nav
Nav is a credit monitoring service that gives both consumers and business owners access to their personal and business credit history.
In addition, Nav will provide self-service tools âlike an easy error disputing tool and a goal-setting tool âto help improve your business credit score.
3. Credit.net
5. Scorely
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Tier 1 2 And 3 Credit
Aside from the FICO credit ranges above, you may have also heard of lenders using tier 1, tier 2, and tier 3 to describe credit.
Youll most commonly see this from auto lenders, often from dealers offering financing. Theyll use your credit tier to make lending decisionslike deciding if you qualify for a car or loan or calculating what kind of interest rate you get on an auto loan.
Tier 1 is the best credit tier, while tier 3 is the worst. But you should know that these tiers dont have official meanings. Different lenders will use different sorting criteria to categorize you.
So at one lender, you might qualify for tier 1 credit with a credit score of 720 , while another will reserve tier 1 for credit scores of 750 or above .
With that said, you shouldnt stress too much about which credit tier you fall inbecause you cant reliably predict it. Instead, just work on building good personal credit.
How Do I Avoid Damaging My Business Credit Score
Business defaults and late or missed payments are some of the main contributing factors to a low score. Here are three tips to avoid damaging your score:
- Look after your credit utilization ratio. Your credit utilization ratio is a figure that describes the percentage of credit youre using versus your total available credit across all of your accounts. This ratio is one of the biggest factors in determining your credit score. As a rule of thumb, youll want to keep this ratio around 30% or less. Having a greater percentage over a long period of time can start to chip away at your hard-earned credit score.
- Dont open many lines of credit. It can be tempting to chase rewards and offers, but it can harm your businesss credit standing. That said, if you have older lines of credit that you use minimally, keep them open if youve had a good repayment history.
- Know your score. You cant address a problem if you dont know it exists. Knowing where you stand can help you address any issues to improve your score or catch an issue before it drags down your score.
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Not A Bank Of America Small Business Client
Small businesses choose Bank of America because we’re more than just a bank.
We’re a trusted partner empowering your business to grow and to keep serving your customers.
That’s why we provide tools and advice to actively manage cash flow, payroll, and point of sale services.
And now for the first time, we’ve partnered with Dun and Bradstreet, a leading provider of business data and analytics for almost 200 years to provide free access to a business credit score.
You can enroll and view your business credit score from your Business Advantage 360 online banking dashboard. There’s no need to navigate to an external website.
Business credit scores may be used by lenders, suppliers and underwriters to help make decisions about working with your business, so knowing where you stand can be important.
Several factors like past payment performance and financial information can impact the score. So we’re also providing educational information to help you understand your business’s credit health.
And if your business doesn’t have a score yet, you can still learn how to take the first step in establishing your business credit file on our Small Business Resources site.
A business credit score is not the only factor considered by lenders, including Bank of America, but knowing how your business may appear to others can empower you to take the next step to improve its financial health.
And when you’re ready, Bank of America will be there.
How Private/public Are Business Credit Scores And Fico Scores
While personal credit scores are kept private for legal reasons, business credit scores and FICO scores are considered a matter of public record and are easily accessed by banks, auto dealers, realtors, suppliers and customers. Bad credit reports follow your business wherever you go and can definitely work against you and your ability to conduct business.
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S To Building Business Credit
1. Make sure your business is legally registered
Incorporate or form an LLC, and get a federal employer identification number. Some business credit reporting agencies will use this to track your business instead of the Social Security number they use to track personal credit.
2. Get a business credit card and a business bank account
Keep your business card strictly for business and your personal credit card for personal expenses to make your taxes easier down the line. Otherwise, follow all the good credit card habits you would use to build good personal credit such as keeping your and making consistent, on-time payments.
3. Work with vendors that report payments to the business credit bureaus
If youre not sure whether one of your vendors reports payments to the credit bureaus, feel free to ask. Its OK to prioritize working with vendors who report payments.
4. Pay on time or, better yet, early
Late payments are one of the worst things you could do for your business credit scores, but paying early is even better than on time. The Dun & Bradstreet PAYDEX® score, a commonly used score, will only award you its highest score if you pay vendors early.
5. Check on your scores regularly
Dun & Bradstreet Paydex Credit Score
While Dun & Bradstreet has five different indicators that reflect current and future credit risk, the most commonly used rating is the PAYDEX score. This score ranges from 0 to 100, with 100 being a business that is the lowest credit risk.
In addition to the PAYDEX score, D& B has a delinquency score, a failure score, a D& B rating, and a viability ranking. The failure score and viability ranking attempt to forecast the likelihood that a company will go out of business in the near future. The delinquency score predicts whether a business is likely to default on payments within a year, and the D& B rating assesses a companys financial strength.
All five of these scores can be found on a Dun & Bradstreet business credit report.
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Personal Vs Business Credit Scores
Your personal credit is frequently summarized into a single number that helps creditors see where you stand at a glance. FICO is the most commonly used method of scoring personal credit. There is no equivalent for businesses each commercial credit bureau scores and reports its own way.
The most important factors for scoring businesses are usually how you pay your bills, how much debt you carry, and what type of industry youre in. Generally speaking, business credit scores have fewer variables than FICO scores, and it is easier to improve the score for a business than it is for an individual.
On the downside, there are fewer legal protections for business credit. Consumer credit laws allow you to challenge anything on your report and have incorrect negative entries removed. There are no such laws when it comes to commercial credit, which means if there are issues with your business credit report, you could have a much tougher time getting those dealt with. You can challenge discrepancies with the agency that has them listed, but they dont have to respond.
Why Your Business Credit Score Is Important
Before we get into the specifics regarding how your business credit score works and how its calculated, lets answer a question you may be asking: Is a business credit score necessary? If youre a small business owner just starting out, you may be wondering if you even need a business credit score, and to a larger extent, why a credit score is important.
At the end of the day, a business credit score is necessary. In fact, in the same way your personal credit score is the key to your personal finances, your score is the key to your business finances, and therefore, plays a large role in the growth and success of your operations.
This being said, although your personal finances may factor into your businesss financial processes, your business credit score will ultimately be one of the deciding factors that contribute to your ability to secure a lease, insurance policy, or financingâas your business credit score illustrates your businessâs trustworthiness with business finances. Therefore, a business credit score is not only necessary, but its extremely important. Plus, a good credit score will help you get approved for financing as well as protect your personal credit.
Additionally, on top of securing financing, a strong business credit score can help you get favorable payment terms from any of your businessâs suppliersâby showing you reliably pay your bills, you might be able to convince your suppliers to offer more comfortable terms.
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