Managing corporate credit is more complicated than it seems at first glance. Lenders and credit card providers look at businesses differently than individuals—that includes credit scores. People have personal credit scores, companies have business credit scores. You’ll need to understand both if you’re applying for a business loan or a business credit card. In this article, we’ll discuss the impact of credit scores and review the following:
- How personal and business credit scoring works
- Minimum credit score requirements for business loans
- Tips to improve your business credit score
Understanding credit scores
For personal credit, FICO® is the most popular credit scoring model. It was first introduced in 1989 as a way for lenders to evaluate borrower risk. FICO® scores range from 300 to 850. They’re one of the factors used to set credit card spending limits, and FICO® calculates them using data from the three major credit bureaus: Experian, Equifax, and TransUnion.
Credit scores are divided into tiers. The lower ranges are “poor” (300-579) and “fair” (580-669), a good credit score is between 670 and 739, and higher scores are either “very good” (740-799) or “excellent “(800-850). These scores are calculated by reviewing your payment history, amounts you owe, and other factors that tell the lender how risky it is to lend you money.
Business credit is similar, though not exactly the same. Experian and Equifax also issue business credit scores, but they range from 0 to 100. Dun & Bradstreet, the third business credit bureau, can track your business credit history if you register for a DUNs number. That should be part of your business credit management strategy.
How lenders use credit scores
Lenders don’t always rely exclusively on business credit scores when you apply for a business loan or business credit card. Your personal credit score can also be part of the application process. There are two types of credit checks:
- Soft credit inquiry: A soft credit check is a cursory look at your credit score and history. It’s typically done in the pre-qualification stage of a loan application. The lender or card issuer looks for defaults or judgments against you. This type of credit check doesn’t show up on your credit report, so it does not affect your personal credit score.
- Hard credit inquiry: A hard credit check is a deep dive into your credit history. The lender or card issuer will pull credit reports from one or more credit bureaus and review your FICO® score. This helps them see if you have responsible credit card practices. Keeping hard inquiries low should be a priority for business owners.
Lenders use credit checks to assess risk. They’re not used to set credit card interest rates for businesses, but a poor credit score might disqualify you from getting credit cards with lower rates and better terms. This, in turn, could make credit card cash flow management more difficult.
Credit scores are also used to set loan amounts and credit card limits. These are important because they affect your company’s spending bandwidth. The increased cost of a higher bandwidth can be offset because credit card fees and finance charges are deductible. That’s one of the many business tax benefits credit cards can give you.
A good business credit score can improve your position with the lender, even if your personal credit score is low. Strengthening your business credit score should be part of your business financial management strategies.
Minimum credit score requirements for business loans
The minimum credit score required for business loan approval varies by lender. If your FICO® score is 700 or better, you should be able to get a business loan or line of credit at a traditional bank or credit union. The minimum score for SBA and term loans is typically 680, but there are bad credit lenders that will approve applicants with lower scores.
As we discussed earlier, Experian, Equifax, and Dun & Bradstreet all issue business credit scores, which you can check if you’re registered with them. FICO® also has a small business scoring service (SBSS), which can be a factor with SBA lenders that require a score of 155 or better.
Keeping your personal and business credit scores high is part of building business credit, so it’s important to put corporate credit card policies in place that help facilitate that. Include a robust credit card expense tracking program and credit card accounting integration with a bookkeeping software like QuickBooks Online, and do regular credit score monitoring.
Factors that affect credit scores
There are several credit score factors you should be aware of. Personal credit scores are calculated using five factors:
1. Payment history (35%)
2. Amounts owed (30%)
3. Length of credit history (15%)
4. New credit (10%)
5. Credit mix (10%)
Business credit scoring also takes into account payment history, amounts owed, and length of credit history—but agencies also factor in industry risk, company size, and vendor/supplier relationships.
Fraud or theft can affect your business credit score, so it’s important to have credit card fraud prevention features and advanced security tools for your business checking account. Maximizing credit card benefits like miles and cash back can also improve your business credit score because you’ll save money and increase your bottom-line profits.
Improving your credit score to enhance loan eligibility
One of the best ways to improve your business (or personal) credit score is to pay your bills on time. This is a key variable in building your business credit rating. Focus on debt payments, because lower balances show lenders you can take on more debt if needed. They also look at cash flow and cash flow management.
Good long-term financial habits are a sign of corporate maturity, and lenders and credit card companies will be more likely to do business with you. Lower scores are a sign of financial distress, which can be caused by economic conditions or mismanagement. Either way, it increases the lender’s risk.
Try to keep your personal credit score around 700 and your business credit score over 70. If the lender uses the FICO® SBSS system, they want a business credit score over 155. These numbers are attainable if you have good spending habits and pay your bills on time—at home and at work. That will enhance your loan eligibility.
Preparing for a business loan application
When applying for a loan, lenders will want to see documentation of your company’s financials. Gather bank statements, financial reports, and debt statements before you begin the process. You’ll also need personal identification, so bring a driver’s license or passport with your business articles of incorporation or DBA certificate. Prepare digital copies of these if you’re applying online.
You should also check your personal and business credit reports before applying for a loan. If there are any errors, contact the credit reporting bureaus. You’ll need to have those corrected before you approach the lender. That usually takes time, so we recommend starting regular credit score monitoring and credit report reviews, if you haven’t already done so.
By paying your bills on time, keeping your debt balances low, and monitoring your credit reports for any erroneous activity that could affect your credit scores, you can set yourself up for success when applying for a business loan.
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