Best Practices for Your Business Credit Score
Your Business’s Financial Report Card
Just like your personal credit score, your business has a credit score to help you get the best trade credit, lower interest rates, and even bigger customers! Your business credit score has a few major differences though.
For one, the business credit score range is 0-100 instead of 300-850 like with personal credit scores.
Business credit scores are more difficult to access because fewer bureaus provide them, but you don’t need special permission to access them unlike with a personal credit score. Each bureau may weigh different factors differently, too. 3 of the most popular scales are:
Your personal credit score is pretty accurate, but according to the Wall Street Journal, up to 25% of business credit reports have errors. This means that your business credit report may not be a truly accurate reflection of your business.
What Affects your Business Credit Score
In a business credit score, your payment history is likely the most important factor. Depending on the system, it may also be the most highly waited factor. Through healthy bookkeeping practices, you can improve your systems of paying your vendors on time and also bring down your debt.
Through healthy bookkeeping practices, you can improve your systems of paying your vendors on time and also bring down your debt.
Similarly to a personal credit score, the age of your credit history also plays a role. Especially when you first start out, use your credit carefully and responsibly to continuously work toward a great score!
Debt and debt usage is also an important factor. If you’ve just started your business, it may be tempting to use credit for everything while you wait to make a profit. However, poor debt usage could end up costing a good business credit score. Take another look at your business plan and gauge what you truly need to run your business. Everything else is just add-ons.
Take another look at your business plan and gauge what you truly need to run your business.
Industry Risk is another area of your business credit score that’s a little different. For example, if you started a fidget spinner company when they were all the rage, the industry was saturated. As time went on, they became less popular, and the industry’s risk rose. While you may not be able to control the level of risk in your industry, you can take care to understand its weight among your overall score. Ask your financial institution how and if they weigh industry risk as part of your business credit score.
Lastly, company size is a factor of your business credit score. In theory, businesses that are larger have grown due to well-developed strategies to scale. If your company is larger, there are more moving parts, but it also is a reflection of your leadership ability.
How You Can Use Your Business Credit Score
You can use your business credit score to determine how much financing you can receive. It will give you a better idea where you land on the spectrum of scores, so you can financially plan accordingly.
Some insurance companies take your business credit score into account when determining insurance rates for your company. The better your rate, the better possibility that you’ll have a lower insurance rate.
More Time to Pay
If your vendors and suppliers know that you have a great score, they’ll be more willing to give you extra time to pay because they know you have a great track record!
Separate Business & Personal Credit Scores
While you may have a stellar personal credit score, it’s always a good idea to separate your personal and business credit scores. Here are three major reasons why:
1. It allows you to see your business clearly.
If you have your personal credit score mixed with your business score, it may be confusing to decipher the proportions. A standalone business credit score allows you to gain a clear understanding of where your business’s credit lies so you can financially plan accordingly.
2. It protects your personal standing.
As we know in the age of Coronavirus, your business could suddenly become disrupted. Should the worst happen and your business struggle, keeping your business credit separate will protect your personal standing.
3. A Trade Credit Report is All About the Biz
When negotiating with suppliers or vendors, you want to be able to point to your credit report and prove your credit responsibility. Keeping your personal and business scores separate allows you to keep the focus on your business for these types of negotiations.
Your business credit report is a useful financial tool to secure financing for a variety of different needs. Need help making a plan to better business credit? Call us at Practical Accounting Solutions, and we can help you make a plan for success!
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Disclaimer: The views presented in this post are meant as educational resources and should not be taken as direct advice for your personal finances or small business. Should you have questions regarding a post relating to your specific finances, please contact us at firstname.lastname@example.org.