What is a Business Credit Score and How to Get a Free Credit Report?
What you’ll learn
- What is a business credit score?
- The importance of a high business credit score
- How is a business credit score calculated?
- Top 4 factors that affect a company’s credit rating
- How to get free business credit reports?
A business credit score is a direct representation of a company's creditworthiness. Like personal credit ratings, a company's credit score plays a crucial role in securing loans, insurance, and high credit limit approvals. By maintaining a good credit score, a company can witness faster growth and better financial flexibility.
The credit rating for businesses ranges between 0 and 100 and is evaluated using different methods. For example, big credit companies such as D&B use the paydex scoring system, whereas Experian uses Intelliscore Plus.
A business’s credit score is linked with its employer identification number (EIN). It is a unique 9-digit code to help credit agencies and authorities identify different companies for taxes and is similar to the social security number for individuals.
Why is a high business credit score important?
A business credit score determines whether lenders and agencies can consider a company for credit transactions, loans, and other financial transactions. It becomes easier for a company with a high score to secure larger loans, get a better deal on insurance, and expand its operations to boost profits.
A NAV Report suggests that businesses that know their credit scores are 41% more likely to get loan approval from the bank. This becomes even more important because unless you track your ratings, it’s impossible to maintain or improve them.
Let’s look at a few ways a high business credit score will benefit a company.
1) Save interest on financing
Companies often have to pay higher interest rates when their credit ratings are poor, as lenders view them as high-risk borrowers. However, getting loans from banks is much cheaper when you have a history of paying on time and are financially sound.
Businesses can save millions even if there is a slight reduction in interest rates, and they also get the flexibility to pick a longer tenure to make payments.
2) Negotiate favorable payment terms with companies
B2B businesses often operate on credit, which makes it essential for them to assess the risk profile of their clients. If the customer has an excellent credit score, they are given higher credit limits and better payment terms than others. Sometimes, the customer also gets the upper hand to negotiate terms if they are not okay with the payment clauses.
3) Save time
It takes a lot of time for businesses to get loans because of the lengthy application processes of lenders. However, companies with a high credit score often get faster approval because of better credibility and less scrutiny done by the lenders. This saves a lot of time and effort for a business.
How are business credit scores calculated?
A business credit score calculation involves a lot of different financial metrics. Whether they have any loan history? Does the business make timely payments after getting goods on credit? These questions are simply the starting point. There are other factors like cash flow and financial statements that also affect a business’s credit score.
Different agencies calculate credit scores in different ways. The range of their ratings, the metrics they are based on, and the interpretation of those numbers vary greatly. We list here the top 5 credit agencies and how they calculate credit scores for businesses to understand the process better.
1) Experian
Experian uses the Intelliscore Plus model to calculate the credit score of businesses. Version 3 of this scoring model gives credit ratings in the range of 300—850, much like personal credit ratings, while the older models range from 0—100.
This scoring model is based on statistics and derives information from lenders, supplies, statement filings, and demographics. The higher the score, the lesser the risk. Lenders can choose to have a cut-off and only do business with a company if their credit rating surpasses that.
2) Transunion
Transunion uses the VantageScore model and gives a rating within 300—850. Scores between 300–600 are considered poor, 601—660 are fair, 661—780 are good, and above 780 are excellent.
Transunion’s credit rating is calculated with 41% weightage on the payment history of the business, 21% to the age and type of credit, 20% to credit utilization, 11% to total balances, 6% to credit behavior in recent times, and the remaining 2% to the available credit.
3) Dun & Bradstreet
D&B is one of the most popular credit agencies, and it uses the paydex score to give credit ratings to businesses. These ratings range between 0 and 100, with a higher score representing better creditworthiness.
To calculate the credit score, D&B refers to the payment history of businesses. If a business has made timely payments to loan lenders, suppliers, insurance companies, and so on, then the score will be high.
4) Equifax
While most credit agencies give one credit score, Equifax gives 3, which signifies different aspects of a business. First is the payment index score, which ranges between 0 and 100 and is calculated by collecting payment history data in the last year.
Secondly, we have a credit risk score ranging between 100 and 992, which is calculated based on company size, credit history, and credit limits. This score indicates the chances of a company falling behind on payments.
Lastly, we have the business failure score between 1000 and 1880, which gives the probability of a company failing within a year. It assesses data like oldest accounts, late payment history, and credit limits available. A company with higher scores in all the ratings will have a low credit risk.
5) NACM
NACM (National Association of Credit Management) is a well-established and reliable credit agency that uses 42 different variables to provide a credit score for businesses. Its report also has 12 months of member trade data and 2 Experian scores for better risk understanding.
What are the factors that affect a business credit score?
It is essential for a company to understand the main factors that affect its credit rating to maintain a high score. So, let’s look at the primary aspects that affect a business’s credit score.
1) Age of your account
If a business is just starting out, it’s not surprising to have less financial credibility. This can result in a low score from credit agencies. However, as a business builds a history of taking credit and ensuring timely payments, the ratings improve.
2) Credit and payment history
Having a long credit history with regular payments boosts a company’s credibility. Defaulting on loans or business credit cards can significantly lower the business credit score.
3) Credit utilization ratio
A business can hurt its credit rating if it maxes out its credit limits too often. A rule of thumb is to keep the credit utilization between 30%–50% of the total limit available. This helps in improving the score over time.
4) Mistakes in the credit report
Sometimes credit agencies also make mistakes on a business’s credit report, which could badly hurt the score. Therefore, companies need to monitor their reports regularly. If any errors are spotted, they need to inform the agency officially to correct them.
How to get free business credit reports?
Credit agencies often charge a hefty amount of money to create a credit report for businesses. However, some companies offer similar services for free. Let’s look at a few agencies that offer free business credit reports.
1) Nav
Nav gives your business access to free credit reports from the popular credit agencies D&B and Experian. It also offers various tools to identify errors in these reports and helps you figure out ways to improve your business’s rating.
2) Tillful
Tillful is a popular site for businesses wishing to peak into their credit health for free. It gives a score of 0–100, with a high score representing more creditworthiness.
The ratings are calculated based on real-time transactions from bank and credit card accounts. They also implement Machine Learning to find patterns in a business’s cash flow and assign the most appropriate rating for them.
3) Scorely
Scorely offers a free credit report to businesses for getting started. They offer easy-to-understand reports based on the data aggregated from credit bureaus.
It also offers a paid service that includes tools to track a business’s ratings and tips to improve upon it.
Wrapping up
It is critical for businesses to maintain a healthy credit score to have the financial flexibility of getting easy loan approvals and favorable payment terms when needed. At the same time, companies must have a robust credit scoring model to evaluate the creditworthiness of clients they are going to do business with.
FAQs
1) How can a company’s credit report affect the business?
Businesses with an excellent credit score can get easy approval for loans which helps them grow their business. However, a poor rating is a primary roadblock to expansion for most businesses.
2) What is a good credit score for a business?
A Paydex score above 80 is considered to be good for businesses, while for other models, a rating above 750 is considered decent.
3) What are the tips to build and improve a business credit score?
A few tips to improve a business credit score are:
- Keep your credit utilization less than 50%
- Always pay on time and do not default on loans or credit cards
- Track your business’s credit reports and inform the credit agencies about any errors if present
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