Business Credit Score - Explained
What is a Business Credit Score?
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Table of ContentsWhat is a Business Credit Score?How Does a Business Credit Score Work?Examples of How a Business Credit Score Works Why is a Business Credit Score Important?Why Creating a Good Credit Score may be ChallengingWhat does a Business Credit Score Report Contain?Key Takeaways
What is a Business Credit Score?
A business credit score refers to a number that measures the business creditworthiness. It determines whether a business qualifies for a loan. The calculation of a business credit score is based on a number of factors like the business financial position, including its financial risk level. The range of a business credit score is between 0 to 100, where 0 represents a high risk, while 100 represents a low risk. In other words, when the number of credit score is high, the better the chances of receiving funds from a financial institution.
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How Does a Business Credit Score Work?
One major factor that financial institutions will consider before giving out a loan to a borrower is the business credit score. If the borrower is big business, the lender will look at its revenue, assets, profits as well as liabilities to determine whether it qualifies for a loan. For small businesses, the lender checks the credit score of the business as well as the owner. The reason for doing this is that there is a close relationship between a small business and personal finances. There are three main business firms that deal with credit scoring. They include Equifax, Dun and Bradstreet, and Experian. Note that these firms methods of scoring differ slightly. For instance, consumer credit scores follow a standard scoring, which ranges from 300 to 850. On the other hand, the range of business credit scores 0 to 100. Regardless of which method is in place, a business can only have a good credit score under the following conditions:
- If it is able to settle its bills in good time
- If it distances itself from legal problems
- It is able to minimize its debts
Generally, a business credit score can have an impact on your ability to access a loan for your business. Note that a credit score forms only a section of a loan acquisition process. There are also other things that a lender will put into consideration. The lender will also look at some other factors such as cash flow, and how long the business has been in operation. All these are factors that a lender will use to determine whether or not your business qualifies for a loan.
Examples of How a Business Credit Score Works
Here is Company A that wants to do business with Company B. For this reason, Company A wants to know Company Bs financial status so that it can determine its ability to pay in full its invoices once they are in business. To be able to do this, Company A will first want to look at its business credit score history to see if its supplier payment history is strong. Company A can also do a subscription purchase service and use it to monitor the credit score of Company B on an ongoing basis.
Why is a Business Credit Score Important?
It is important to have a clear understanding of your credit score as well as the role it plays when it comes to obtaining a loan. A credit score may be beneficial in the following ways: It will make it easier for your business to get financing. All you need to do is to ensure that you establish a strong business credit score. This will help increase your ability to access a loan and ate favorable terms. It will help lower rates on insurance policies. Note that when you have a good credit profile, it creates a layer that separates your personal and business finances. It makes it easy to track expenses in your business. Finally, it will increase your power of borrowing. Ii means that if your credit score is high, you will be able to secure a huge loan for your business.
Why Creating a Good Credit Score may be Challenging
The following statements explain why building a good credit score may be challenging:
- It takes a long time to be able to establish a business or personal credit history.
- It is easier to influence and make an improvement in your credit score, but it is difficult to make changes to it. The reason is that you cannot obtain a credit score on your own, but an external rating agency gives it to you.
- Keeping internal records as well as monitoring small business credit score requires a lot of time and patience.
What does a Business Credit Score Report Contain?
A business credit score report may contain the following:
- Business credit summary and scores
- Corporate registration as well as contact information
- Information on banking, leasing, and insurance
- Major facts about the business
- Collections and payments summaries
- Bankruptcy filing
- Tax lien filings
- Filing information on Uniform Commercial Code
- Judgment filings
- A business credit score refers to a number that measures the business creditworthiness
- One major factor that financial institutions will consider before giving out a loan to a borrower is the business credit score
- The range of a business credit score is between 0 to 100, whereby 0 represents a high risk, while 100 represents a low risk
- There are three main business firms that deal with credit scoring. They include Equifax, Dun and Bradstreet, and Experian
- A credit score forms only a section of a loan acquisition process as there are also other considerations such as cash flow and the duration of the business has been in operation.