Business credit scores are vitally important to small businesses. In today's competitive market, a faulty credit score can dramatically affect the bottom line of any business and can lead to higher interest rates, difficulty in securing loans and potential problems with suppliers. Conversely, a favorable credit history can serve as the linchpin to success. It not only can save a small-business owner a considerable amount of money, but it also can provide access to capital with which to grow the business.
As the majority of lenders reference commercial credit scores when making lending decisions, small-business owners should educate themselves on the importance of establishing and maintaining good business credit.
Particularly important is the understanding of what a small-business commercial credit score is and how it affects a business. Below is a quick test for business owners to determine whether their commercial credit score knowledge is as well-honed as is necessary to survive in today's thriving small-business market.
Take this quiz to ensure that your commercial credit score is working to help your small business rather than working against your bottom line.
TRUE or FALSE:
If I have a small business, I automatically have a small-business credit score.
There are no drawbacks to
using my personal credit score, rather than a business credit score, when attempting to secure funding.
FALSE. The credit reporting companies require a minimum amount of information
to generate a business credit report and score. If a business doesn't have at
least one tradeline and/or one demographic element (such as length of time the
business has been credit active, how many employees, etc.), then a credit report and score are not generated.
To establish a business credit score, you first should ensure that your
business vendors are reporting your payment history to one of the major credit
reporting companies. If your existing vendors do not report this information,
you should encourage them to do so. This will help to build your commercial
credit profile. If you are willing to switch vendors or take on additional
vendors, many of the credit reporting companies have lists of suppliers who report this information.
Anyone can request and view my business credit score.
FALSE. It's true that many small-business owners fail to separate their business expenses from their personal expenses. The credit card used to take the family out to dinner also gets used to gas up a company vehicle or to pay for supplies used by the business. Half of all small businesses use some form of personal credit to finance their businesses.
However, the weakness of relying solely on personal credit is clear. If your business ever becomes at risk, your personal credit score becomes at risk as well.
Additionally, many creditors have begun moving away from relying on personal credit alone when judging the financial health of the owner's small business, as personal credit does not ideally predict future business behavior. Many creditors instead have begun taking advantage of new blended commercial scoring tools that integrate both personal and business credit attributes to predict small-business risk.
The model used to determine business credit is much like the model used to determine personal credit. However, while a personal credit score can range from 350 to 850, a business credit score ranges from 1 to 100.
There are things I can do to improve my business credit score.
TRUE. Unlike personal credit reports, which are regulated and can be viewed only with the permission of the report holder, commercial credit reports are available to the public. This means that anyone — including potential lenders and suppliers — can openly view your business's credit report. Given the public availability of business credit reports, it's imperative to monitor your business credit score.
TRUE. First, ensure that your company's vendors are reporting your business payment history to one of the major credit reporting companies, as mentioned above. The greater the number of vendors who report a good payment history to the credit reporting companies, the greater your business credit score will be.
Just as you might monitor your personal credit, it is incredibly important to monitor your business credit consistently as well. Your business credit score is one of the first things lenders, suppliers and even some customers look at before deciding to do business with you. It's used to determine how much money lenders will loan you, how much credit suppliers will extend to you, what interest rates you'll be charged and what you'll pay for insurance premiums.
By consistently monitoring your business credit score you can ensure that your business has not fallen victim to business identity theft or fraud, the losses from which cost American companies billions of dollars each year. Furthermore, it's important to scan your business credit file for mistakes. As the business owner, you may request that the credit reporting companies correct any mistakes to ensure that your credit file is accurate.
It's vitally important to be aware of possible inaccuracies or negative credit data on your credit file, should they exist. By simply increasing your awareness of the factors that drive your current company credit score, you can begin to effectively manage your credit behavior. As always, the best thing that you can do is pay all financial obligations on time.