Business credit scores are vitally important to small businesses. In today's competitive market, a faulty credit score can dramatically affect the bottom line of any business and can lead to higher interest rates, difficulty in securing loans and potential problems with suppliers. Conversely, a favorable credit history can serve as the linchpin to success. It not only can save a small-business owner a considerable amount of money, but it also can provide access to capital with which to grow the business.
As the majority of lenders reference commercial credit scores when making lending decisions, small-business owners should educate themselves on the importance of establishing and maintaining good business credit.
Particularly important is the understanding of what a small-business commercial credit score is and how it affects a business. Below is a quick test for business owners to determine whether their commercial credit score knowledge is as well-honed as is necessary to survive in today's thriving small-business market.
Take this quiz to ensure that your commercial credit score is working to help your small business rather than working against your bottom line.
TRUE or FALSE:
FALSE. The credit reporting companies require a minimum amount of information to generate a business credit report and score. If a business doesn't have at least one tradeline and/or one demographic element (such as length of time the business has been credit active, how many employees, etc.), then a credit report and score
are not generated.
To establish a business credit score, you first should ensure that your business vendors are reporting your payment history to one of the major credit reporting companies. If your existing vendors do not report this information, you should encourage them to do so. This will help to build your commercial credit profile. If you are willing to switch vendors or take on additional vendors, many of the credit reporting companies have lists of suppliers who report this information.
FALSE. It's true that many small-business owners fail to separate their business expenses from their personal expenses. The credit card used to take the family out to dinner also gets used to gas up a company vehicle or to pay for supplies used by the business. Half of all small businesses use some form of personal credit to finance their businesses.
Additionally, many creditors have begun moving away from relying on personal credit alone when judging the financial health of the owner's small business, as personal credit does not ideally predict future business behavior. Many creditors instead have begun taking advantage of new blended commercial scoring tools that integrate both personal and business credit attributes to predict small-business risk.
The model used to determine business credit is much like the model used to determine personal credit. However, while a personal credit score can range from 350 to 850, a business credit score ranges from 0 to 100.