A good business credit score can be a game changer for your small business. With good business credit, you can secure financing more easily, get better terms from your vendors, attract better investors, lower your insurance rates, and even increase the value of your business.
So what is a business loan? And how do you build it?
Let’s take a look at how a business loan works, how it can help you grow your small business, and how you can build it.
What is a business loan?
A business credit score is a reflection of the creditworthiness of your business. Basically, it tells lenders how likely you are to pay back any money you borrow. Like a personal credit score, a higher score can bring a number of borrowing benefits, from lower interest rates to a higher likelihood of approval.
Any small business can set up a business loan (except sole proprietors). You just need your employer identification number (you can get yours for free with the IRS assistance tool), a business bank account, and some good business borrowing habits.
How does a business loan work?
When you take out a business loan, establish trade lines, or open a business credit card with a lender or merchant that reports to the credit bureaus, your payment history and other information will likely be reported to one of these bureaus.
Your business credit score is calculated based on information from your business credit reports. This may include your repayment and credit history, your debt utilization, the amount of debt you carry and the age of your business.
You will notice that your business credit score is not the same as your personal score. This is because personal business scores range from 300 to 850, while business credit scores range from 0 to 100. Most lenders consider an 80 or higher to be a good business credit score.
Business credit bureaus may also use different metrics and names for your business credit score. As you explore, you may see references to DUNS numbers or PAYDEX units. DUNS numbers are used by Dun & Bradstreet to help identify your business in their system (your lenders and partners will be able to see and verify your business this way as well). A PAYDEX account is another name for your business credit score.
What are business credit bureaus?
There are three major business credit bureaus that collect the information used in your business credit report.
- Dun & Bradstreet
- Experian Business:
- Equifax Business:
Most of your small business credit report will be made up of information reported to the bureaus, but the bureaus can also get information from public records, your corporate financial statements, press releases or news reports, and of course, self-reporting. information. When you review your report, you’ll see all of this information plus information about your business. This may include names, addresses, phone numbers, your business structure (ie limited liability company) and more.
What is a business credit score used for?
Your business credit score is used for many purposes, and some of them may surprise you.
Business financing. Many lenders use your business credit profile to help them make borrower decisions. This can refer to business credit cards, small business loans, or a business line of credit. Some lenders can also use your personal credit score if you don’t have a business loan.
Vendor or Supplier Agreements. Sellers use business credit scores to determine if your business will be a good customer. A good score indicates that you are more likely to pay invoices on time.
Insurance rates. Your business credit score can affect your insurance rates and terms.
Partnerships and investors. Your credit score is one of many indicators of the financial health of your business. Most potential partners and investors are more inclined to work with a business that has healthy finances.
Why is it important to build your business credit?
A good business credit score can make it easier for you to grow your business and achieve your goals. It opens doors to new possibilities. Here are some reasons why your business credit is important.
It makes securing financing easier. With good business credit, you are more likely to be able to secure financing. There are many types of business loans, but a good score can also lead to lower interest rates, higher credit limits and more favorable terms. While there are often many other factors that go into a lender’s decision, a good credit score can pave the way.
It can protect your personal finances and credit. When you use a business card or business loan, it can help insulate your personal credit score from the ups and downs of running a business. According to the Small Business Administration (SBA), 46% of all small business owners use personal credit cards for business expenses. This can increase their credit utilization rate and probably doesn’t offer them the amount of capital they need. Also, if anything prevents them from making their payments on time, it will affect the owner’s personal credit. Using a business loan can help protect you from this.
Your vendors may offer you better deals. Sellers love businesses they know they can rely on. A good business credit score can show that you are a trustworthy and reliable customer. They may give you better prices or offer deals to keep you around.
It can increase the value of your business. Your business credit score is a transferable asset. That means if you ever decide to sell your business, the credit score will go with it. A good credit score can make your business a more valuable acquisition.
Your insurance rates may be lower. Insurance companies are also more likely to extend lower interest rates and premiums if you have a good business credit score.
How do I check my business credit score?
You can check your business credit report and your business credit score on a number of different websites. (You may recognize some of the companies you use to monitor your personal credit reports.) Remember, you’ll probably have to pay. There are some free options, but they are often not very detailed. you pay for what you get. You can access your report through any major business credit reporting agency.
One of the main differences between personal and business credit scores is that anyone who makes a payment can access your full business credit report.
How can I build better business credit?
If you are an entrepreneur or small business owner looking to build a loan, you may not know where to start. It can be a little overwhelming at first, especially if you’re a new business or startup. But business lending can help you thrive. Just remember that just like personal credit, your business credit rating won’t become perfect overnight.
Know your score. The first step to improving your credit is knowing where you stand. Take the time to review your business credit profile and understand what it says about your business credit. This can show you where you can improve the most.
Get funding to help build your account. The next time you need financing, whether you need to fill cash flow gaps or finance a new project, look for lenders that report to the business credit bureaus. It is not always necessary to have a business credit history to secure financing. some lenders will use your personal information or ask for a personal guarantee. This type of lending can help you build your account. You can’t build a credit history if you don’t have anything to report on your profile.
Pay on time. If you have lines of credit, loans or other payments, it’s important to make payments on time. Like your personal credit history, this is one of the biggest factors in calculating your business score.
Create trade accounts with your suppliers. Vendor credit is relatively easy to obtain, and your prompt payments with suppliers are a good way to build a strong profile. Thirty or 60 day payment terms can be a $50,000 or $100,000 small business loan, but it can help build your credit profile. Just make sure your sellers report to the credit bureaus.
Monitor your credit profile. While you’re working on your business credit, make sure you keep track of your profile. This can help you identify red flags, mistakes, or areas for further improvement.