If you've ever applied for a mortgage, an auto loan, or even a credit card, you know that you have a credit score--a number, usually between about 300 and about 900, that determines how confident your creditors should be that you would pay your obligations on time. But did you know there's a similar number many companies use when deciding whether to extend credit to your small business, or whether to do business with you at all?
Though these scores aren't officially called credit scores, they serve the same purpose. Knowing what they are and how to improve them is an important tool if you need to borrow for your business, use a business credit card, or want vendors or others to extend you credit, explains Steve Smith, CEO and co-founder of data aggregation company Finicity.
Just as with your personal credit score, there are several competing organizations that issue credit scores for businesses of every size. Dun & Bradstreet dominates the field with its Paydex score, but there are also Experian's Intelliscore Plus and FICO's LiquidCredit Small Business Scoring Service (SBSS). Each service will assign your business a score between 0 and 100, with scores over 80 considered very good, and scores below 50 considered very bad.
As with your personal credit score, whether you're aware of it or not, there's a good chance your business already has one, even if it's tiny, even if it's a home-based business. That's because there's a good likelihood that some companies you already do business with are reporting your payment habits to one or more of these scoring services, just as your credit card issuers and utility companies contribute information that goes into your personal credit score.
"If you're a small business and you work with ADP or QuickBooks Payroll, they may be a reporting entity," Smith explains. The same goes for suppliers such as office supply chains. "The kinds of things they report are maximum outstanding credit, number of days to pay, and number of days delayed," he says.
Companies that lease you equipment or extend credit for goods or services pay close attention to these scores, and often make credit decisions on the basis of the score alone, Smith says. Lenders such as a bank will also pay attention to your business's score or scores, although they will likely do more in-depth investigation into your company's finances, so that its credit score or scores will just be one factor in the decision. A good or bad business credit score can also affect the interest rate you pay.
Just as with your personal credit score, there are smart strategies you can use to raise your business credit score and get more access to better credit. Here are some steps Smith recommends:
1. Find out what's in your business credit report.
Dun & Bradstreet will update you with changes to your credit score (but not the score itself) and other scores with a free service called CreditSignal. You can also pay to get your credit score and other information from D&B and Experian. It may be worth investing some money in finding out your credit score. Creditors who've checked your business credit score may also be willing to share that information with you.
2. Ask happy creditors to report about you.
If you're a small or new business, the credit reporting agencies may not have created an account where they are collecting information about you. They may start doing so if you ask. Dun & Bradstreet will issue a D-U-N-S Number for your business at your request for free if you're willing to wait 30 days, or need it because you're applying for a federal grant. Otherwise, you may need to pay for expedited service.
Meantime, ask creditors you have good relations with if they would mind reporting their positive experiences to D&B, and perhaps Experian and FICO as well. In particular, Smith says, you should make sure your payroll company is reporting about you. "It tends to be both the largest and the highest priority payment you make," he says.
3. Pay your bills on time--or early.
Needless to say, if you receive a bill from a company that reports to these organizations and payment is required within 30 or 60 days, paying that bill on time will help your business credit score. "If you're trying to improve cash flow by paying your suppliers late, your Paydex number will be significantly affected," Smith warns.
You'll be even better off if you pay your bills before the deadline, the earlier the better. This can be a great way to boost your business credit score if you need to. It's worth noting that your Paydex score is dollar-weighted, meaning that bigger debts will affect your score more than smaller ones will.
4. Use less credit than you have.
As with your personal credit score, your business credit score will depend in part on credit utilization--that is, how much available credit you have compared with how much credit you're using. So if you have a $12,000 line of credit, and owe $10,000 on it, that can lead to a lower score than if you have that same $10,000 of debt, but have a $20,000 line of credit, or other available credit that you haven't used.
Thus, you can improve your credit utilization by increasing your line of credit or creating new credit such as a business credit card. Credit utilization is another good reason to pay your bills early, since that will bring down your utilization as well. It can even help if you make a partial payment on a bill early rather than waiting and then paying it all at once.
Paying down your debts, and making payments early, is a great way to improve your business credit score. But paying off your debts as quickly as you can and only using as much credit as you need will give you a more solid financial outlook as well.