When Does Your Business Credit Score Matter?

A business credit score measures the overall creditworthiness of a business, much like a personal credit score measures the overall creditworthiness of an individual. While the concept behind each credit score is similar, there are significant differences every business owner should understand.

What is a business credit score?

Your business credit score, while distinct from your personal credit score, is similar in concept. Basically, a business credit score is used to demonstrate how financially sound and reliable a business is, as well as how likely it is to make its owed payments on time. 

Like personal credit scores, a business credit score is a numerical measure representing a business's creditworthiness, but the scale is 0 to 100. 

Three major credit bureaus determine business credit scores: Dun & Bradstreet, Equifax, and Experian. The scores determine creditworthiness for several things, including business loans, credit cards and payment terms. Strong business credit and a responsible payment history can also reduce the cost of borrowing money.

"Each credit bureau will collect data and information about a company's financial history and attach a score, but each bureau has a different set of criteria they value when attaching a score," Jeffrey Bumbales, director of strategic partnerships and marketing at online lender Credibly, told business.com.

What is FICO? 

FICO is a three-digit score determined by activity on your credit reports. Lenders use it to determine your creditworthiness and how likely you are to repay a loan. Your score dictates the type of business loan you can get, as well as how much you can borrow, for how long and at what cost. It helps companies make quick lending decisions. The higher your score, the greater your chances of getting approved for a loan and the lower your interest rate will be. 

FICO score ranges 

FICO scores range from 250 to 900. Most lenders consider a credit score of 670 or higher to be good. 

Did you know? Most of the best small business lenders accept credit scores of 500 and up. A few require higher scores, however. For example, our review of Biz2Credit found that those in need of a loan must have a credit score of at least 660.

This chart lays out the FICO score ranges and ratings. 

Editor's note: Looking for a small business loan? Fill out the questionnaire below to have our vendor partners contact you about your needs.

How is a business credit score different from a personal credit score?

While the concept behind a business credit score and a personal credit score is similar, they are distinct. A business credit score does not impact one's personal FICO score, for one. If the business can't pay back a loan, it won't affect the owner's personal credit score. But that is not the only difference between the two. Here's a look at some more: 

Access 

Business credit scores are publicly available, unlike private personal credit scores, and are attached via an employer identification number (EIN). A personal credit score is tied to your Social Security number. You can fill out an online application for an EIN and get approved in seconds. 

Scoring criteria 

Business credit scores are also determined by a different (though sometimes overlapping) set of criteria than personal credit scores, said Luke Voiles, vice president and business leader of QuickBooks Capital at Intuit.

"Personal credit scores are determined through FICO's algorithms based on your personal credit history," he said. "Business credit scores, however, are typically determined by looking at payment history, amounts owed, length of credit history, credit mix and new credit. On the business score side, there is not the same consistency you get with FICO. There are many providers of business scores that are measured and scaled differently, so it can be confusing for small businesses to understand their scores."

Tells a different story 

According to Mike Ross, managing partner at commercial collection agency Miller, Ross & Goldman, a business credit score often reflects whether a business pays its vendors and creditors early, on time or late.

"A perfect score of 100 indicates that the subject company typically pays 30 days before agreed terms or invoice payment due dates," he said. "A 90 indicates 20 days before, and an 80 indicates payment on time. Scores below 80 are then progressively reflective of the number of days a company typically pays beyond agreed invoice terms. For example, a 70 is indicative of an average 15 days beyond agreed terms. There are other relevant factors and scoring models on how business credit is calculated, including industry risk, average debt load, years in business and company size." 

Bottom line: A business credit score and a personal credit score look at different things to ascertain creditworthiness, but both give lenders an indication of your ability to pay back a loan. Even if you have a bad credit score, there are business loans you can get.

What is a business credit score used for?

Much like a personal credit score is used to determine an individual's borrowing eligibility, a business credit score is primarily useful when a company needs financing. A lender relies on a business credit score to help determine whether to extend funding to a business.

"A business's credit score is usually most important when trying to secure financing," Bumbales said. "The better a business's credit score, the more lucrative options it will have when applying for a loan or other financing products."

A credit score's impact on borrowing 

A business credit score can influence multiple things about the financing a company can obtain, including the amount of funding, repayment terms and interest rate. The score is used to determine whether the lender should extend business credit, how much to lend and the terms. 

Other companies you do business with may also use your business credit score to decide whether to extend more generous payment terms.

If you're considering financing a purchase or borrowing money, it's essential to understand your current business credit score and how any new funding might impact it in the future.

Business credit score factors

While each credit rating agency has its own methods of calculating a business credit score, there are a few common factors.

• Industry risk: Even if your business is financially sound and has a strong business plan, operating in a risky industry could reduce your business credit score. For example, businesses in the legal cannabis industry face legal challenges many other companies do not; that can be a drag on an otherwise financially stable cannabis business's credit score. 
  
  
• Company size: The size of a business in terms of revenue matters significantly to a business's credit score. Company size is used to determine important information like debt-to-income ratio and cash flow, which influences a business's ability to pay its bills on time and meet its debt service obligations. 
  
  
• Payment history: Meeting all your payments in full and on time keeps your business credit score healthy. Avoiding any collections referrals or liens is critical, as those can remain on your credit history for up to seven years. 
  
  
• Age of credit history: Like a personal credit score, your business's credit score is influenced by its credit history. A positive track record over a long period influences your credit score for the better, and a business that has been operational for several years is better positioned than a brand-new company.
  
  
• Credit utilization: Another major factor is how many lines of credit or loans you have on your books. A business with high debt usage is likely to see a negative impact on its credit score. This is especially true if many new lines of credit were opened within the past year.

Tip: If your application for a business loan is turned down because of a poor credit score, find out which areas are hurting you and work on improving them. If it's your credit utilization, reduce your debt outstanding.

How can I get my business credit score?

To obtain your business credit score, you have to request a credit report from the three major credit bureaus by visiting their respective websites.

Can I improve my business credit score?

If your business credit score isn't as good as you were hoping, don't worry. These are some steps you can take to improve it. 

• Monitor your business credit score regularly. "Simply keeping an eye on business credit scores is an impactful first step in improving it," Voiles said. "Many business owners are unaware they exist, unsure of how to access them, or don't check them regularly or take them into account when managing their business." 
  
  
• Keep your business and personal finances separate. "Business owners should strive to keep their business finances and personal finances separate," Bumbales said. "Headaches such as [a high] personal debt-to-income ratio, lack of business credit and more can arise if a business owner does not keep their personal finances and business finances separate."
  
  
• Make payments on time. "Beyond careful monitoring, making on-time payments to creditors is one of the best things a business owner can do to improve their business credit score," Bumbales said.
  
  
• Reduce your overall debt-to-income ratio. "Improving your business credit score can be done similarly to improving your personal credit score: by being a responsible borrower," Bumbales said. "Pay your obligations on time and avoid creating too much debt compared to your revenue. If you have had any past strikes on your credit, make sure to resolve them as soon as possible."

Even with a healthy business credit score, a lender might require a business owner to personally guarantee a loan. This typically includes a personal credit check, according to Ross, and is especially common when the business is a sole proprietorship or has only recently launched.

While a business credit score and a personal credit score are distinct, it is best to maintain a good score for both, as they can sometimes complement one another. Business credit reports can be just as important in securing business financing as a strong personal credit score and guarantee. Maintaining good business credit reduces the cost of borrowing money and avails your business to more favorable payment terms with creditors and vendors alike.

"While one doesn't necessarily impact the other, with some exception, the benefits of habitual early and on-time payment practices on both fronts will have broad and positively impactful benefits over the course of time, for both the business and the individual," Ross said.

Bottom line: Your business credit score directly impacts the cost of borrowing. The stronger your business's financial position, the better you look to lenders and vendors.

Business credit score FAQs

How often should you check your business credit score?

There is no universal answer. As each business operates uniquely, the frequency of lending and borrowing compared to incoming revenue can be dramatically different across industries and businesses. A starting rule of thumb is to check at least once each quarter. Many businesses might prefer to check monthly. Doing so more often than that is likely unnecessary.

What is a good business credit score?

Business credit scores don't look like personal credit scores. A perfect business score is 100, meaning you usually pay 30 days early. A 90 means you pay 20 days early, and an 80 means you pay right on time. By most standards, 80 and above is the very good range and will get you favorable interest rates. If your score is between 50 and 79, you are in the good or fair range: You pay all of your bills, but some are late. Anything below 50 will set off red flags and impact your ability to borrow money.

Does closing a business credit card affect your credit score?

Yes. This is more the case for small businesses than large ones, but credit history is rolled into the calculations, and canceling cards can negatively impact your credit history.

How can you get a free business credit report and score?

Plenty of companies offer free credit reports. It's often best to go to the source. Nav and Experian offer free reports, but there are limits on how many free reports you can get in a year.

Adam Uzialko contributed to the writing and reporting in this article. Source interviews were conducted for a previous version of this article.