By Kali Geldis, Nav
Most business owners are familiar with their personal credit scores. You've probably used your personal credit score to get credit cards, buy a home, or to rent an apartment. But now that you've started your business, you can start building a credit history that shows lenders your business is a good bet.
Business credit scores are similar to personal credit scores in many ways. Your business's history of applying for credit, paying suppliers on time, and how you handle lines of credit or loans all factor into your business credit scores. That data is reported to business credit bureaus like Dun & Bradstreet, Experian, and Equifax. (You can check your business credit data for free every month at Nav.)
Here are some reasons why a business credit score matters – the doors it can open can be game changing for your company.
1. You can't get some SBA loans without it.
The gold standard of business loans is one backed by the Small Business Administration. These are bank loans that are guaranteed by the government, which means they carry some of the lowest interest rates you can possibly get as a small-business owner. The most popular of the SBA loan program is a type called 7(a). This program uses a specific business credit score – the FICO SBSS – to score applicants. If you don't have enough of a business credit history to have a FICO SBSS, getting one of these loans is much more difficult.
2. You have more loan options once you establish a business credit history.
An SBA 7(a) loan isn't the only loan type that is more difficult to get without a business credit history. Some traditional bank term loans for small businesses require a business credit history, and these, again, have some of the best rates for small business loans. Your personal credit history can help you access some types of business financing, like lines of credit or business credit cards, when you're first starting out. But there are 44 different types of business financing out there, and generally the options with lower interest rates and fees require a business credit score to get approved.
3. Other businesses use it to check up on you.
Unlike your personal credit scores, which can only be accessed by yourself and lenders to whom you give permission, other people looking to understand your financial health can pull your business credit reports. This could be competitors who want to know if you're thriving or flailing, or it could be potential business partners or investors.
For example, let's say you own a couple of businesses already and are looking to take on a new venture. A potential business partner could pull your other companies' credit reports to see how you manage your bills. When one bad handshake can be disastrous for a small business, it's no surprise that owners use business credit data to decide who to work with.
4. It helps you protect your personal credit.
In a recent survey of small businesses by 12 Federal Reserve banks, 87 percent of small-business owners used their personal credit in some way (either a personal guarantee or personal credit score) to get financing for their business. Using your personal credit as leverage to get financing means that if you default or make a late payment on the business loan, your personal credit can take a nosedive. If you build a business credit history, you can save yourself some headaches and keep your personal credit safe.
5. It can save you money on financing.
We've already explained how a business credit score can open up new lending options to you and how those options tend to be lower cost than the options that rely on personal guarantees and personal credit scores. What's important for business owners to understand is how more options affects your bottom line – good business credit saves you major money.
A merchant cash advance (MCA) APR can run anywhere from 15 percent to 150 percent and doesn't require a business credit score to get approved, whereas an online business loan generally carries a 7 percent to 30 percent APR and considers your business credit score as a main factor. That's a major difference in cost. For $50,000 financed through an MCA at 150 percent APR, you pay $75,000 in interest and fees over the course of a year. Finance that same $50,000 through an online business loan at 30 percent APR, and you'll pay $15,000 in interest and fees. You can check out our nifty business financing options chart to see how different loan types stack up.
6. It can help with cash-flow problems.
Having access to more financing options by having a business credit history can help you keep cash flowing through the business and keep you in business during your down season. There are some financing products, like invoice factoring and cash-flow loans, specifically designed to help with cash-flow issues. Term loans can help you keep payroll going while you add new positions to grow, too. Cash flow is one of the top financial concerns of business owners, and having some extra capital on hand goes a long way.
7. It can save you money on insurance premiums.
For some types of business insurance, insurance companies will do a business credit check to help decide whether to approve you. Just like how a good credit score can save you money on personal insurance products like car insurance, a good business credit score can save you money on insurance premiums for your business.
8. You can't get trade credit with some big players without one.
If your business depends on vendors who use net-30, -60 or -90 terms, you may be limited in who you can work with if you don't have a business credit score. One of the most important business credit scores – Dun & Bradstreet's Paydex score – measures specifically how quickly you pay back tradelines with net terms. ("Net terms" essentially means a product is sent to you on credit on the promise you'll pay its cost in a set period of time – often 30 days.)
Some major retailers and suppliers will only work with small businesses that have a Paydex score and an established history of on-time payments. You could miss out on deals with major outlets by not building that business credit history now with current clients and vendors.
About the Author
Kali Geldis is the head of content syndication for Nav and helps small-business owners stay up to date on the latest news in business leadership, financing, and credit. Previously, she worked as editorial director for Credit.com, building an editorial team that creates content shared with a network of partner sites on all things personal finance.