Do I need a business credit score to start a business?
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If you’re considering a leap into entrepreneurship, there are a few things you need to consider. Unless you’ll be financing the launch, operations and eventual growth with just your own capital, you’ll need to pay attention to your credit scores—which might include those developed specifically for business.
If your venture is still in the idea stage, your consumer credit scores are far more important. Lenders will assess them to decide whether or not you’re eligible for loans and credit lines, and if so, what the terms will be.
Eventually, though, business credit reports and scores may come into play. They’re similar to consumer credit scores, but more inclusive and complex, and specifically for your company rather than you as an individual.
You can start building your business credit by applying for one of the best small-business credit cards. But you won’t have a business credit score until you have opened your doors and information about the way you’re managing your company is available to add to a business credit report.
What is a business credit report?
The most ubiquitously used business credit reports and scores are developed by Experian Business, Equifax Business and Dun & Bradstreet. Just as your consumer credit scores rate your personal credit habits for risk assessment, business credit scores do the same for your company’s creditworthiness.
When you apply for a business credit product, lenders may check your business credit reports and scores from any of the companies that create them. These reports and scores help lenders predict everything from how likely you are to send payments on time and repay the debt in full, to the probability of your business remaining open in the next year or two.
While consumer credit scoring systems are fairly consistent from company to company, there is far greater variance among business credit score algorithms. The numerical ranges associated with each are different. It can get pretty complicated, so focus on the basics first.
What is on business credit reports
All business credit reports pull and list information about your company. In general, these reports will include your business’s identification and registration, past and current credit obligations from suppliers and lenders with a detailed payment history, bank balances and activity, assets, inventory, sales and any liens, judgments and bankruptcies.
How business scores are generated
To create a business credit score, all the information from your business report will be input into an algorithm designed to produce a variety of risk scores. Often included in the scores will be demographics and comparative data regarding the performance in your company’s industry.
Scores differ based on company and purpose
As for the scores, they depend on the company that creates them, as well as their purpose. Among the most common include:
- Experian Business’s Experian Intelliscore Plus ranges from 1 to 100, with 1 representing the highest level of risk and 100 representing the lowest.
- Equifax Business produces several scores. One is for payments, which ranges from 1 to 100, with 1 being the worst. Another is for credit risk, which ranges from 101 to 992, and higher numbers indicate lower risk. And another assesses business failure risk, and it ranges from 1,000 to 1,610, with lower scores indicating a higher level of risk.
- Dun & Bradstreet also has many different business credit scores. For example, the PAYDEX® score ranges from 1 to 100, with higher numbers being better, and the delinquency predictor score, which ranges from 101 to 670, with higher numbers being preferable.
Although the reports and scores assess a wider variety of data points and information, as with personal credit scores, business credit scores weigh a company’s payment history as especially critical. Therefore, the best way to hike up your business scores is to make good on all of your debt payments.
What you should know
There are a few other details about business credit reports and scores to know at this juncture. Cost for example. You can get free consumer credit reports from annualcreditreport.com, but to check your business credit reports, you’ll have to purchase them from the companies. And though your personal reports and scores are relatively private, business credit reports are public.
Also, be aware that hanging out a shingle and declaring it your business isn’t enough to start up a business credit report. You’ll have to establish your business as a separate entity by incorporating it.
For example, it may be a Limited Liability Corporations, which means that you won’t be personally liable for the company’s debts or liabilities. Other steps include getting an Employer Identification Number (EIN) from the IRS so you can file your company’s taxes, open a bank account for your business and easily apply for business credit. Eventually you’ll probably want to register for a Dun & Bradstreet D-U-N-S Number, too, since it might be necessary to apply for a loan or appeal to a new business partner.
The bottom line
Right now, you don’t need a business credit report and score. You can start building business credit by getting a business credit card—even before you launch your business. But for now, concentrate on your business plan and personal credit history. As long as your venture is viable, it turns a profit and you treat all your credit products and anyone else you do business with well, you’ll be on your way to a good business credit score—no matter which company produces it.
Becoming a small-business owner really is exciting. Do it right by getting guidance from the pros. I strongly recommend that you contact SCORE, which will connect you to a mentor who can hold your hand through the business credit journey.