Most people understand that their creditworthiness is based on their credit score. However, did you know that your business also has a score, and it is used to determine whether you can acquire business financing? These are a few things you should know about your company’s score.
How Personal Credit Scores are Determined
Although up to 800 data points may be considered when determining your company’s score, consumer scores are limited to a few factors. For example, if you want to build your credit, ensure that your payment history is solid because paying your bills on time suggests that you will continue to do so.
If your business is new or has kept its credit utilization low, you may not receive rates or credit terms that are as favorable as an established business with a credit history. Therefore, you may need to build small. However, don’t max out your credit immediately or hold high debt. A favorable utilization rate is around 30%. The number of times your credit is pulled also affects your score. Every time you apply for a loan or other type of credit, your report is pulled. Lenders may become concerned about your ability to repay a loan if you have recently submitted several loan applications.
Business Scores vs Personal Scores
While personal scores range from 500 to 800, business scores range from 1 to 100. Those with higher scores are able to get better credit terms, while those with low scores may have difficulty getting any credit at all. A high business score reduces your need to prepay for supplies, products and services and gain better interest rates.
Your business score is important because it allows you to separate your business and personal finances. This separation protects your personal assets from company liabilities. One way to ensure this division is to build business credit rather than relying on your personal credit to finance business expenses.
Establishing Your Business Credit
If you hope to establish credit for your small business, you should incorporate your company or choose a business structure that limits your personal liability. You also need a federal taxpayer identification number and a business bank account. Open a credit card for your company and make small purchases, but consistently pay off the balance or make your payments regularly. Finally, contact the credit bureaus and start your business credit file.
You receive free access to your personal credit report from the three major credit bureaus once per year, but you will have to pay for your business report. You should still pull it at least two times per year.
Your business credit score directly affects your ability to receive and use credit. Therefore, prioritize the establishment of credit for your business.