As simple as it can be, a credit score tells lenders whether a borrower is a good candidate or not. And to your surprise, a credit score is not only for individual consumers but for businesses too. Although there are no federal regulations that govern business credit score reports, it is still widely used for credit purposes.
In many ways, a credit score is the same for businesses and consumers. For both, the higher the score, the better. However, the scoring models vary for both and also depend upon the referring agency.
For instance, consumer credit score ranges between 300 to 850, where 850 is the best. On the other hand, for businesses, some models consider a score between 1 to 100. In contrast, others may consider it between 101 to 662, or some may also consider between 0 to 300. The credit scores for businesses are calculated a little differently. Keep reading to know more about how your business credit score is calculated.
The first and the foremost thing that most credit score agencies consider when calculating your business credit score is your company’s payment history. It means they would consider how much you pay in dues and bills. And also, when you pay them.
For example, suppose your monthly utility bills range between $1,000 to $1,200. You make payments as soon as your invoice is generated. In that case, your credit score will likely be better. There could be other similar bills that may come into play when calculating your business credit score.
The second thing that most credit score agencies consider is “credit utilization”. In simple terms, it is the ratio of the amount of credit that you use against the credit you have available for your business.
Ideally, financial experts suggest keeping the credit utilization ratio as low as possible. Against your credit utilization, you can see options here and find a sound credit card for your business. The lower your credit utilization, the better deals you can get on your business credit card.
It is worth mentioning here that keeping your credit utilization to zero is also not recommended. Contrary to common belief, low credit utilization can damage your business credit score.
Another critical factor that most agencies and lenders consider when calculating your business credit score is the size of your company. The business size not only refers to the number of working heads but also refers to financial behavior. In other words, the more money your business deals with regularly, the better are the chances to score higher.
Last but not least is the mix of credits that your business uses. The credit score agencies usually refer to the types of loans, mortgages, or any other credit that your company uses. Besides, the amount of debts are also included in the credit mix.
As the leading market experts explain, a diversified credit mix is more likely to give a boost to your business credit score. And therefore, improve your chances of securing a loan.
As already mentioned, a business credit score is similar to consumer scores in many ways. But at the same time, it is also different in some ways. For a better understanding of your business credit score, we recommend you talk with your banking institute.