What is a Good Business Credit Score?
Did you know that 45% of small business owners don’t know they have a business credit score? On top of that, 82% don’t know how to interpret their business credit score? Have you ever wondered, what is a good business credit score?
This guide will provide an overview of business credit scoring as well as in-depth explanations for how credit bureaus rate business credit. It will also detail different business outcomes that can be influenced by your credit scores.
How important is business credit?
Business credit is a summary and analysis of a business’s financial history. It indicates a business’s financial health and ability to repay its debts and meet financial obligations. Your business might be successful without a strong credit history, but that doesn’t mean you should neglect it.
Imagine that one day any of the following occurs:
- You lose one of your largest accounts to a new competitor.
- An important portion of your business is destroyed by a fire.
- Your business shuts down for months due to a global pandemic.
- You require new suppliers for reasons outside of your control.
There are at least a few of these events that you don’t need to imagine. The world is unpredictable, and your small business will need to navigate obstacles. You need access to cash to survive and thrive in an unexpected business scenario. Business credit creates easier access to cash when you need it. Think of it as your business’s emergency safety net.
It’s not all doom-and-gloom, either. Credit can be an important driver of business opportunity as well. Imagine the following:
- You identify a major e-commerce opportunity that requires an upfront investment in inventory.
- Your fiercest competitor decides to sell their business, and you want to buy them out to become the market leader.
- Your ideal candidate for an important role is interested in joining your team, but hiring this person would temporarily strain your cash flow.
Business credit also provides access to cash for fueling growth, purchasing inventory, hiring employees, investing in new equipment, and more.
How does your business credit facilitate access to cash? It demonstrates to lenders, suppliers, investors, business partners, and vendors that your business is financially viable. It gives these parties an indication of their risk in engaging with your company. If your business is viewed as too risky, you will have limited funding opportunities and more costly cash flow management.
And remember, ANYONE can view your business credit record at any time. Therefore, to set your business up for long-term success you need to build your business credit and increase your business credit score.
What is a business credit score?
Your business credit score reflects the degree of financial risk a lender takes on when it provides your business with a credit facility, such as a revolving line. It’s also a key factor vendors use to determine if they want to do business with you and what payment terms to offer. It is therefore common practice for lenders and vendors to look at your business credit score to understand its financial health before engaging with your company.
If you have a good credit score, your borrowing and repayment terms will be more favorable and the credit application process will be easier. For example, banks will offer you a lower interest rate or a larger loan amount if you have good credit. Conversely, a poor business credit score will require a higher interest rate, more strict penalties for default, and less favorable payment terms (more on this later).
If someone were to tell you that your business credit score is 65, would you know what that means in practical terms? Small business owners who understand their business credit scores are 40% more likely to get approved for a credit facility. Therefore, it’s important to understand how business credit scoring works and what makes a good credit score.
The definition of a “good” or “poor” business credit score depends on which credit reporting agency is doing the scoring. Business credit scores are assigned by four credit agencies: Experian, Equifax, Dun & Bradstreet, and FICO (Fair Isaac Corporation). These agencies use several factors to determine your business credit score and each has its own scoring system.
Business credit scores start at 1 and usually run up to 100, but in some instances, they go higher. A higher number usually means your business is more creditworthy, but not in all cases. The differences in scoring ranges are one reason you need to understand your business credit score.
The credit rating used can depend on the type of lender. Dun and Bradstreet (D&B) is the most commonly used credit score by traditional lenders. The Small Business Administration uses FICO’s Small Business Scoring Service (SBSS) to assess lending risks. Since different lenders and vendors use different agency scores, it is a good idea to know what your business credit score is with each of these agencies and how it is calculated. Here’s a brief overview of each credit agency.
Dun and Bradstreet
Dun and Bradstreet is the only business credit agency that allows you to self-report credit-related items. To do so you need to open an account and claim your business page. D&B’s many types of credit scores make it the most comprehensive business credit reporting agency. However, they also make it difficult to monitor your credit scores with this agency. An interesting point to note about D&B’s credit scores is that they are used by the Federal and State governments to vet contract partners.
| Credit and Risk Scores | Score Range | Risk Description |
| D&B Credit Appraisal Composite rating | 1-4 | 1 indicates better overall creditworthiness |
| D&B PAYDEX Score | 0-49 50-79 80-100 | High risk of late payment Moderate risk of late payment Low risk of late payment |
| Supplier Evaluation Risk Rating | 1-9 | 1 indicates the lowest risk of a supplier shutting down within 12 months. |
| D&B Viability Rating | 1-9 | 1 indicates the lowest risk of failure or closure within 12 months. |
| Delinquency Predictor Score | 101-670 | A higher number indicates a lower risk of severe delinquency. |
| D&B Maximum Credit Recommendation | $ amount | Determined by analyzing the size, industry, and payment history of a business |
Experian
Experian’s business credit rating is based on public records of debt collections and other legal records, vendor payments, and overall business financial history data. The agency asserts that, “The objective of the Experian Business Credit Score (Intelliscore PlusSM) is to predict seriously derogatory payment behavior.” This is one reason why Experian’s score is the most common one used by banks.
| Credit and Risk Score | Score Range | Risk Description |
| Intelliscore Plus | 76-100 51-75 26 – 50 11-25 1-10 | Low Low to medium Medium Medium to high High |
Equifax
Equifax maintains three types of business credit risk scores. Equifax uniquely factors in your company’s total available credit when calculating your business credit risk score.
| Credit and Risk Scores | Score Range | Risk Description |
| Business Credit Risk Score | 101-992 | A higher score indicates lower risk. |
| Business Failure Score | 1000-1610 | A lower score indicates a higher risk of business operations ceasing within 12 months. |
| Payment Index | 0-100 | The closer the company scores to 0, the better it pays its suppliers. A score of 100 means all suppliers were being paid past due. |
FICO Small Business Scoring Service (SBSS)
The FICO SBSS score is based on information from D&B, Equifax, and Experian. It rates a business on a scale of 0 to 300. This score is popular with Small Business Association lenders.
| Credit and Risk Scores | Score Range | Minimum score for SBA lenders |
| SBSS Score | 0-300 | 160 |
Why does business credit matter? (A Case Study)
Numerous aspects of your business operations are impacted by your business credit. The difference between a business with poor credit and one with excellent credit can be seen in a variety of ways, as described below. As an illustration, we compare “Poor Credit Score Pete” to “Great Credit Score Greta” in terms of the impact of a business credit score. Pete ranks on the low end of all the systems above, while Greta’s business has nearly perfect scores. Let’s compare their experience in a variety of business scenarios.
Access to Capital
The types and terms of financing you can access depend on your business credit. In order to qualify for popular SBA loans with their favorable terms, you must have excellent credit. On the other hand, credit cards with high annual percentage rates are often necessary for businesses with poor credit who need funds.
| Credit facility | Pete | Greta | Business Impact |
| $ 50,000 SBA loan | Not possible | 7.75% | Access to inexpensive, abundant capital |
| Bank loan interest rate | 29% | 6% | More than 4x higher interest rates for poor credit |
| Equipment leasing | High interest rate and large down payment, may not qualify | Favorable interest rate and lease terms, longer lease or no deposit | With a good credit score CAPEx is easier and less expensive, resulting in improved cash flow. |
Business Relationships
Many small businesses do not realize that lenders, vendors, suppliers and potential business partners will often check your business credit score before engaging in an agreement with you. In addition to indicating how financially risky your business is, your business credit score also indicates your credibility and trustworthiness. A business that defaults, even once, or whose credit score is experiencing a downward trend might experience a negative impact on these relationships.
| Financial factor | Pete | Greta | Business Impact |
| Equity Investor | Will demand more equity and control, or decline to invest | Competition among investors will lead to a fair deal | Equity investment can fuel growth and profit, but only in a fair deal. |
| Personal financial risk | Personal assets are collateral for borrowing | None | You can run your business separately from your personal circumstances. |
| Business credit score | No growth in business credit due to the use of personal credit | Opportunity to continue improving business credit score | The business gains more access to capital at more favorable terms in the future. |
| Interest rates | Higher, due to the use personal credit being used | Unaffected | The business receives optimal interest rates and therefore expends less cash flow related to debt. |
| Record keeping | Requires professional assistance to separate personal and business finances for tax reasons | Straightforward business record-keeping and tax status | Better business record keeping makes applying for credit facilities easier and quicker. |
Separation of Business and Personal Finances
Personal and business finances should be kept separate for a number of reasons. If you have poor business credit, however, lenders will likely look at your personal credit score and may ask for a personal guarantee in the form of pledged collateral. This, of course, jeopardizes your hard-earned personal assets. In addition, the simple act of a lender making a “hard” pull on your personal credit account will decrease your personal credit score. The table below demonstrates how using your personal credit score to fund your business impacts your business.
| Financial factor | Pete | Greta | Business Impact |
| Personal credit score | Decreases due to hard credit pulls | Remains unaffected | With good business credit, a business score is unaffected by personal credit score and vice versa. |
| Personal financial risk | Personal assets are collateral for borrowing | None | You can run your business separately from your personal circumstances. |
| Business credit score | No growth in business credit due to the use of personal credit | Opportunity to continue improving business credit score | The business gains more access to capital at more favorable terms in the future. |
| Interest rates | Higher, due to the use personal credit being used | Unaffected | The business receives optimal interest rates and therefore expends less cash flow related to debt. |
| Record keeping | Requires professional assistance to separate personal and business finances for tax reasons | Straightforward business record-keeping and tax status | Better business record keeping makes applying for credit facilities easier and quicker. |
How long does it take to build business credit?
Several factors that affect how long it takes to build (or improve) your business credit. These include how long you have been in business, whether you have separated personal and business finances, and your starting credit score. Generally, it takes about 3 years to build a business credit profile that lenders will deem to be reliable. All credit agencies provide a wealth of advice, explanations and resources concerning how to build business credit with their respective agency.
Here are 10 key steps you can take to begin building your business credit and improving your credit score.
- Obtain a separate Federal tax ID for your business and create a business entity.
- Open bank and utility accounts in the name of your business.
- Make sure the credit agencies are tracking you. Obtain a D&B number.
- Obtain and review your business credit reports from each credit agency.
- Look for errors and omissions in your credit report and contact the agency to correct them immediately.
- Understand the main factors that influence your credit rating for each agency.
- Pay your vendor accounts on time, or even early for vendors who report to agencies.
- Apply for business credit cards and pay balances on time and frequently.
- Do not leave large balances outstanding on any credit facility for extended periods.
- Establish trade credit with suppliers and vendors.
The bottom line: How important is business credit?
