Written by: Guest | Best Company Editorial Team
Last Updated: February 24th, 2020
Guest Post by Choncé Maddox
Your credit score is an important three digit number that can tell a lender a lot about your financial situation. While your personal credit score holds considerable weight, so does your business credit score if you’re an entrepreneur.
Your business credit score is determined by seven factors:
- number of trade experiences
- outstanding balances
- payment habits
- credit utilization
- trends over time
- public records
- demographics like years on file and business size.
Your personal and business credit scores are two separate entities and should be treated as such. While your personal credit score measures your ability to repay debts in a timely manner, your business credit score demonstrates how well your business can meet its financial obligations.
Perhaps you’re wondering if you really need a business credit score and how important it is when growing your business. Here are four ways a business credit score can help you build your business, along with tips to help you establish your score.
1. Secure competitive loan rates
Just like with a personal credit score, having a good business credit score can help you secure competitive loan rates and terms. If you are looking for funding whether to buy materials, fund start-up costs, or pay team members, you can apply for a business loan.
Business credit scores typically range from 1 to 100 with 75 being excellent. Equifax however, is a credit reporting agency that ranks business credit risk scores on a scale from 101 to 992. The higher your business credit score, the better your interest rate will be along with your repayment terms because lenders will view you as a more trustworthy borrower.
2. Protect your personal credit
A business credit score, also known as a commercial trade score, can help to keep your financial accounts for your business and personal needs separate.This is important because then a creditor can’t claim any of your personal assets to satisfy a debt.
In a perfect world, you’d pay off all your business debt on-time and use credit wisely. However, in the case that you are unable to repay a business loan or fall behind, the creditor can’t use your home or personal assets as collateral.
Separating finances can also help you get organized and track your cash flow and profit more efficiently, especially around tax time.
3. Qualify for better small business checking accounts
Did you know that your business credit score could help you qualify for a business account at a bank? While banks don’t normally check your credit when applying for a business checking account, they may look at your financial history. This is normally the case with riskier applicants. Banks may consult a reporting agency, usually ChexSystems, to get information regarding your banking history.
If you are applying for a business credit card, your credit score will definitely be checked and factored into the final decision. Of course, you can probably get a business credit card by using your personal credit score, but it’s still wise to keep your personal and business finances separate.
4. Lower your insurance premiums
If you’re interested in obtaining business insurance, your business credit score may apply. Insurance can be a great way to protect your business in the event of an emergency.
There is general liability insurance as well as coverage for data breaches, worker’s comp, and natural disaster.
When you apply for coverage, your business credit score may be required. If it isn’t, insurance companies can still inquire about it and use it as a factor in determining the price of your policy.
An excellent business credit score can secure you the best premiums.
How to establish and build your business credit score
Some business owners don’t think about their business credit score until they need it. At that point, it’s often too late to focus on building your score because it won’t be established in time to address your current needs.
It’s best to start the process now. Here are a few steps you’ll need to take:
- Get an EIN number. An EIN number is just like a social security number for your business. You’ll use this number when you file taxes and it’s used to establish your business credit score.
If your business is an LLC or S-Corp, you probably already have an EIN number. If you don’t you can go to the IRS website to start the process.
- Open a business bank account. Next, you can open a business checking account. This will help you keep your personal and business finances separate.
Set up your business phone number. You can use your personal number or a landline number.
- Open a business credit file. Your next step is to open a business credit file with the credit reporting agencies so you can start building your credit score. To do this, you need to have an LLC or S-corp, and EIN number, a business bank account, a business checking account, and dedicated phone number for your business.
- Get a business credit card or credit account. Building your business credit score is merely a matter of obtaining a business credit card and using it wisely, establishing a credit account with companies that report trades, or both.
If you have vendors you use for supplies or need to borrow from another creditor, make sure that they report this information to the credit reporting agencies so you can build your score after making timely payments.
The Bottom Line
Your business credit score is used by lenders, vendors, and creditors to assess your creditworthiness as a company. You will likely use it at some point when running your business so it’s important to use these steps to establish it early on and build it over time.
Choncé Maddox is a professional writer who enjoys covering small business and personal finance topics. She left her job in the web design industry to produce killer content and manage her own writing business full time. She is passionate about helping business owners be more productive and discover the tools and strategies they need to reach their goals.