The Importance of a Strong Business Credit Score

Your business credit score can open financial doors and help you accomplish your goals. In fact, your score matters in more situations than you may think.

This is why it's important to understand how business credit scores work—and what you can do to improve your own.

How do business credit scores work?

Your business's credit score reflects how well you've been paying bills related to the company. Three main rating agencies—Dun & Bradstreet, Equifax Business and Experian Business—put together these reports and scores.

Each rating agency uses a slightly different calculation and numbers. In all cases, higher scores represent better credit. To calculate your score, these agencies look at a variety of factors, including:

• Your payment history on credit cards and invoices
• Whether you've missed payment deadlines on invoices, loans and credit cards
• The length of your business's financial history

The importance of good credit

While personal credit scores are private, business credit scores are available to the public. A good credit score speaks to the financial strength and creditworthiness of your business. People who may check your score through these reporting agencies include:

• Lenders or banks during approval review for a business loan, line of credit or credit card
• Vendors reviewing your business for financing approval
• Landlords when you apply to rent or lease a property
• Insurers when you apply for business insurance
• Potential investors, business partners and new clients

The benefits of a good business credit score

Having a good business credit score may help your company access better terms on business loans and credit cards. Not only could it increase your chances of qualifying, but you could also get a lower interest rate—meaning it'll cost less to borrow. A high credit score could also help you avoid having to put up collateral against a loan.

Your vendors could also reward a high credit score. For instance, they may be willing to accept a lower down payment on a contract for goods and services or give you more time to pay so you can make larger purchases.

A strong business credit score might also lead to lower insurance premiums because it shows insurers you're responsible and less of a risk. Landlords, investors and potential clients could be more likely to work with your business when they see stability from a high score.

Tips to boost your business credit score

Follow these steps to give your business credit score a boost.

Make sure you're registered

To build business credit, you need an Employer Identification Number, or EIN. Register for an EIN early in the process of starting your business—you'll need it to hire employees, form a limited liability corporation and take other important steps. Some sole proprietors put off getting their EIN because they may not need it right away, but it's essential to building business credit.

If you don't have an EIN, you can apply for one for free from the IRS. If you're unsure whether you're in the system, you can request your business credit report from the rating agencies. If they can't find your information, then you're currently not building business credit.

Open a business credit card

A business credit card is a fast way to start building your score. Take out a card, make a few purchases and pay off the balance each month to give your score a boost. If you can't qualify because of a lack of business credit history, you still might be able to take out a card by guaranteeing the balance with your personal credit score.

Pay vendors on time

Avoid missing payment deadlines because having overdue debts or bills sent to collection will hurt your score. If you have the financial resources, you can put yourself in an even better position by paying early.

Ask vendors to report your payments

Learn whether vendors are reporting your payment history to the credit rating agencies. If not, ask them to start doing so to help improve your score.

Monitor your score periodically

Keep track of your business credit score monthly, and take advantage of free reports as much as possible from each of the three credit agencies. Spread these out over the year so you can check in on your business credit more frequently.

As you're evaluating, watch out for mistakes that hurt your score—like if a vendor reports an unpaid bill that you actually paid. You may also discover signs of fraud, such as someone opening a credit card using your company's name. Catching and reporting these issues will protect your company's score.

The bottom line

By following these steps and taking action to build your business's credit score, you can build a strong financial foundation for your company to borrow, grow and thrive.