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Small Business Credit Scoring Explained

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If you own a small business, you might have wondered what credit scores have to do with your company. Not only do individuals have credit scores, but businesses have credit scores as well. So what exactly is your business credit rating? And why do you have to make sure that your business has a good credit score?

In this article, we’ll go over what a business credit score is, what it means for you, and how to improve it.

What is a credit score?

A credit score is a rating that shows how reliable you are at paying off debts. A small business credit score is the same but for your business. A higher number is good, as it shows that you pay back what you borrow on time. This shows that you’re trustworthy, and lenders are more likely to take you on as a client. A low credit score can suggest that there are issues, such as unpaid debts, missed payments, bankruptcy, or court action against your company.

Why is a business credit score so important?

Your small business credit score shows how well your company pays back its debts and makes payments on loans. When you’re looking for more funding, lenders will look at your credit score to decide whether or not to lend money to you. This will affect you when you’re looking for funding, such as loans, overdrafts, or business credit cards for day-to-day business purchases. Most lenders will have a minimum credit score that a small business must have to get a new line of credit. With some lenders, your credit score will also determine the interest rate you’re offered.

If your small business has a poor credit rating, you can still look at getting a new line of credit. There are plenty of adverse credit lenders that can help if you have poor credit. However, you will usually have to pay higher interest rates if your business has a poor credit rating. You might also find that your credit limit – how much you can borrow – is lower. This is because small businesses with poor credit scores are seen as riskier investments by lenders.

“Building your credit score is the number one route to accessing flexible and valuable business funding. Getting a business credit card lets you and your employees work on building your company’s credit score, getting ready for larger investments, while helping you handle purchases easily and smoothly.”

– Damian Brychcy, COO and US MD of Capital on Tap

What are credit agencies?

Credit agencies are the organizations that monitor credit scores. They evaluate the credit history of an individual or business and assign a score. Some of the main credit agencies include Experian and Equifax, but there are others that offer credit rating services as well. Each credit agency has its own metrics. Some companies rate a credit score from 0 to 100, while some rate it from 0 to 999. It’s important to know the scale that a particular credit agency uses so that you can effectively gauge how good your credit score is.

What is credit history?

Credit rating is more than your small business credit score. The credit score is based on your credit history. The history shows all the instances your small business has applied for a line of credit, any missed payments or late repayments, as well as more serious credit issues such as repossession of property.

How can I improve my business credit score?

If you need to improve your small business credit score, one of the main ways is to use a line of credit responsibly. Some ways to do this include:

  • Not using your entire credit limit – This can make it appear that your business is struggling financially and might not be able to repay other loans
  • Not applying for too many new lines of credit – Again, this can give the impression that your business is in trouble
  • Making payments on time – Be sure not to miss any payments and avoid paying late.

Damian Brychcy goes on to add: “Business credit cards can help build your company’s credit score, even with small purchases, while using cash won’t have an impact on your credit history. This is one of the big advantages to giving your employees credit cards, as long as you make sure that you keep up with the required repayments.”

Conclusion

A business credit score is very similar to a personal credit score. Credit agencies keep track of your loans and payments and you can check your business’s credit score with any of the large credit agencies. If you make your repayments on time, your business’s credit score will improve. You should always try to avoid late payments, or missed payments as this will lower your small business credit score. Having a business credit card, such as a Capital on Tap business credit card (issued by WebBank) provides an easy way to build your credit score.