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If you want to grow your business, having a good business credit score is often the first step. Having a weak credit score can put obstacles in the way of your business’s success, such as an increased difficulty gaining access to financing options. In the past year, 36% of small businesses have been denied their funding requests due to a low credit score.

Having a strong credit score can make your business become more appealing to lenders, making it easier for you to gain access to small business loans or business lines of credit. Being able to showcase your financial responsibility through your credit score can affect:

  • How much business credit a supplier will extend to you
  • What repayment terms you’ll receive
  • What interest rates you’ll pay
  • How much credit or financing a bank or lender will extend to you
  • What insurance premiums you’ll pay

Here, we’ve outlined the basics to understanding your business credit score, so that you can work towards creating stronger credit and bettering your business’s finances.

Personal credit vs. Business credit

Most of us are familiar with a personal credit score. It has an impact on several everyday finances, from applying for a credit card to securing a mortgage. Your personal credit score is connected to your social security number (SSN) and determines your creditworthiness as an individual, based on factors such as your payment history or credit utilization. A personal credit score ranges from 300-850.

Similar to a personal credit score, a business credit score is used to showcase creditworthiness and financial health, with the goal to establish yourself as trustworthy to potential lenders.The primary difference between the two scores is that your business credit score reflects your company, disconnected from you as an individual. This score links to your employer identification number (EIN) or business tax number and typically ranges from scores of 0-100.

How is your credit score calculated?

Your business credit score is determined by a number of factors, but there are 5 considered to be the most important. These factors include:

  1. Payment history: Does your business pay bills on time? Having a good payment history is the most important requirement for getting a good credit score. It’s so important that some credit scores are almost exclusively calculated based on payment history. Information regarding your payment history can be gathered from banks, vendors, or lenders that report back to credit bureaus.
  2. Company size: How big is your company in terms of revenue? The size of your company can be used to determine your cash flow and debt-to-income ratio, which can have an impact on your business’s debt service obligations and ability to make payments on time.
  3. Age of credit history: How long has your business been establishing its good credit? A good credit score is based on consistency and the ability to maintain good standings over time. Therefore, a business that has been operating for years will naturally have a stronger credit position than one that’s just starting out. 
  4. Credit utilization: How many lines of credit does your business have and how often are they used? Using too much of your credit or having a record of loan stacking can negatively impact your score, since it signals to lenders that your business doesn’t have very strong finances. This is especially true if you opened multiple new lines of credit in the most recent year.
  5. Industry risk: Which industry does your business operate in? Some industries are intrinsically riskier than others, which can make it difficult to build up a good credit score. 

What is a “good” credit score for a business?

A business credit score typically ranges between 0-100. A business with a credit score of 0-15 would be considered a high-risk business, which can be a major red flag to potential investors or lenders. As the credit score goes up, the business’s risk levels go down.

The ideal credit score for a business is 80 or higher. At this score, your business is considered to be low-risk. Having a low-risk reputation can open up your business to more opportunities such as access to loans and financing which can help support your business growth.

Tips for creating good business credit

Whether your business is just starting out or you’re simply trying to get your business back on the right track, here are some tips to help with building good business credit:

  1. Monitor your score frequently: Get into the habit of checking your business credit score on a regular basis. Your credit score can be obtained through a business credit bureau, such as Exerian, Equifax, or Dun & Bradstreet. Though just knowing your score isn’t enough to improve your business credit on its own, checking your score regularly can help you catch negative factors or errors in your report early. 
  2. Always pay your bills on time: Staying on top of your payments and getting them done in a timely manner is essential to maintaining a strong business credit score. Utilizing digital invoices and automating your payments can help to ensure that your bills are paid on time. With a Grasshopper Innovator Business Checking account, you can gain access to tools such as Bill Pay, which make it easier to effectively manage your bill payments. 
  3. Keep a low credit utilization ratio: A credit utilization ratio represents the amount of credit that you’ve used relative to the amount of credit you have available. When this ratio is low, it means you’re less likely to max out your credit, which can help to boost your business credit score. Typically, 30% is considered a good credit utilization ratio, though 10% is the most ideal. If you find your credit utilization ratio is getting too high, you may want to consider upping your credit limit.
  4. Be patient: A good credit score cannot be built overnight. It takes time to establish yourself as a business, and it can take even longer to improve a credit score that has taken a significant negative hit. Have patience and continue to practice good financial habits, and over time your credit score will reflect your hard work.

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