Business owners have a lot of numbers, metrics, and ratios to worry about. One that tends to get overlooked is business credit score—a number that represents how creditworthy your business is to lenders.
A business credit score doesn’t factor into many financial equations. On the surface, having a high (or low) score won’t change your revenue, or make you more attractive to potential customers or employees.
On the other hand, a robust credit score will not only give you access to better and more affordable financing options (from no-fee credit cards to long-term loans), but can actually increase the value of your business. So, if (or when) the time comes to sell your business, a high business credit score can actually net you more profit.
Let’s explore why a high credit score is good financial sense for business owners.
What is a business credit score?
If you’re a new business owner, you may not even know that you have a credit score separate from your personal FICO score.
These scores are, indeed, separate (though related). Your personal credit score is linked to your Social Security number, which you often get at birth. When you file for an employee identification number (a requirement in most, but not all, cases for small businesses), you start your business credit history.
Your business credit score functions much the same way as your personal credit score: It’s shorthand for your credit history, telling lenders (such as banks or online lenders) how likely you are to repay a loan on time.
A business credit score ranges from 1-100 (as opposed to 350-800 with personal credit scores). It is based on many factors that people who have worked on their personal credit scores will recognize, and a few that are unique to business credit scores. Factors include:
- Credit history: Your business credit utilization ratio, payment habits, outstanding balances, and other trends that detail your business credit history.
- Demographic details: Your business’ industry, size, and years in business are also considered in your score.
- Public records: If you have bankruptcies or liens, which are public record, your score will take a hit.
Your business’s credit score is a major factor (among many, including your personal credit score, available collateral, and time in business) lenders use to determine whether to lend you money—and if so, at what rates.
How a great business credit score increases your business’ value
There are two primary ways in which a good business credit score makes your business more valuable.
Better financing options means greater chances of success
As mentioned above, lenders look at your business credit score when deciding whether to extend you a loan, a credit card, or other business financing. The better your score is, the better your terms will be.
If you have a low business credit score and need financing—to take advantage of a bulk deal on inventory, to help pay for a renovation, to cover costs after a disaster—you will be forced to settle for a less-than-ideal financing agreement. That could mean high interest rates, shortened repayment terms, or the need for valuable collateral.
The financial upside here is obvious: The less money you spend on acquiring financing, the more you can invest into your business. While competitors in your industry worry about cash flow gaps and making payroll while repaying their loans, you’ll have wider profit margins you can use to grow your team, roll out new marketing campaigns, and purchase new technology.
Therefore, if the time comes for you to retire or otherwise move on from your business, suitors will see a company with little debt and massive gains over the field.
Your business credit score and business are linked
Your business credit score remains with the business (and the corresponding EIN) even if you depart from the company.
That’s an incredible selling point: When the new owners of your business inherit the company, they’ll want a high business credit score in order to pursue affordable financing of their own.
On the other hand, buyers could make the argument that a low credit score will limit their maneuverability, driving down the price of your business. You can bet that a business credit score weighed down by debt will also be a problem for buyers.
Your business credit score can be as much of an asset to your bottom line as high quality machinery or a strong brand name. Make buyers aware of what your business credit score means to them (though, unlike personal credit scores, anyone can request a copy of your business score) and you’ll see your value rise.
How to start building a great business credit score
Now that you know how important it is to have a great business credit score, it’s time to start working toward one. There are a few different tactics you can take—pursue them concurrently, when possible:
- Pay your bills on time.
- Keep your credit utilization ratio down.
- Don’t mix your personal and business expenses.
- Lease or finance equipment when possible.
- Use a diverse mix of credit sources (credit cards, loans, etc.).
- Establish credit accounts with suppliers.
- Always keep an eye on your credit report for mistakes.
As a business owner, you have a lot on your plate, from overseeing the day-to-day operations of your business to planning for the future. Don’t let building your credit score fall by the wayside, especially since doing so is often as easy as creating and following good financial habits. The payoff for doing so can be enormously valuable, both today and when it’s time to sell your venture.
Written by Jared Hecht.
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