Last week, we talked about changes in credit scores and reporting, but did you know that small and mid-sized businesses have credit scores too? That’s right! Credit scores aren’t reserved solely for individuals; businesses are given them as well. So this week, let’s talk about what to know about business credit scores.
How businesses are scored
Business credit scores help lenders assess the risk for things such as business loans, financing, insurance, and small business credit cards. A good business credit score can help small businesses qualify for financing to expand their business, while a low credit score can make it more difficult for businesses to negotiate favorable payment terms or secure the amount of financing they seek.
Even though there is no universal scoring model for business credit, all models consider some of the same factors to different degrees. Business scoring methods take into account payment history, age of credit accounts, and the amount of credit utilized in the same way personal credit scoring models do. However, they may also take into account other factors that are unique to businesses, such as the amount of capital a business owner has personally invested in the company, as well as the personal credit score of the owner. Lenders may see an owner who is personally financially responsible and has reasonably invested in the business as a much safer bet than one who hasn’t.
Credit scores may also factor in the amount of collateral and assets a business possesses that could be sold if a business fails to repay a loan, and if the market conditions are right for the business to succeed. Some industries are naturally considered riskier than others, and that directly impacts a business’s credit score.
The Big Three in business credit
The three major business credit bureaus in the United States are Dun & Bradstreet, Experian Business, and Equifax Small Business. Instead of scoring a business on a 300-850 scale like FICO and VantageScore, they score business credit on a 0-100 scale, with higher numbers associated with less risky investments for lenders.
Additionally, the Fair Isaac Corporation uses information from these three bureaus to create its own score for small businesses in the U.S. and international markets, referred to as FICO SBSS. Its scoring system ranges from 0-300 and is the system primarily used to pre-screen applicants for SBA 7(a) loans, the Small Business Administration’s most popular form of business financing – $28 million in these loans have already been approved this year. A score of 160 or higher is considered necessary for a business to secure a 7(a) loan over $350,000.
While a 2015 survey found that 72% of the small business owners it surveyed did not know where to find information on their business credit score, and an even higher percentage didn’t know how to interpret the score, there are resources available for businesses to change that. This includes the SBA, which has useful resources on how to apply for, monitor, and improve business credit.
