For small business owners, starting a business can be hard on the pockets. To be successful, some may use business credit cards to make purchases while establishing business credit. Questions that some may ask when thinking of obtaining a business credit card may be, “How will I build credit for my business?” or “Is building a credit rating for my business the same as building a personal credit score?” Small business owners can be just as confused on how to build and maintain business credit as the government is on how to manage COVID-19.
For small business owners looking to boost their credit ratings, I have prepared a breakdown of how to get started, how the business credit scoring model works, and several tips on how to garner the best business FICO credit score.
1. What do I need to do to get a business credit score and rating started?
Before small business owners can get started with establishing credit, they need to understand that the business needs to be created as a separate entity. For example, LLCs, corporations, sole corporations, and LLPs are separate entities. This means when these types of companies go under, it will not affect your personal credit score.
A Sole Proprietorship and General Partnership, however, are not separate and cannot establish a separate business credit profile. The drawback to a Sole Proprietorship and General Partnership is that lenders will look at your personal credit score to determine company credibility and both parties assume all liabilities. If they become insolvent, all company assets including personal assets can be seized by creditors, which will also affect your personal credit score.
2. What is the Business FICO model, and what should small business owners focus on to boost their scores?
It is worth noting that a few more factors are added and tweaked on a business credit score than on a personal credit score. The categories are as follows: Number of Trade Experiences, Outstanding Balances, Payment Habits, Credit Utilization, Trends Over Time, Public Record Recency, Frequency, and Demographics. There are three major business credit reporting bureaus: Equifax, Experian, and Dun & Bradstreet. Additionally, business lenders use four business credit scores to determine the risk of your business: Dun & Bradstreet PAYDEX, Intelliscore Plus, FICO LiquidCredit Small Business Scoring Service, and Equifax Business Risk Scores. Unlike personal credit reports, business credit reports are made readily available to the public.
Dun & Bradstreet PAYDEX Score
The Dun & Bradstreet PAYDEX ranges from 1-100, with higher scores indicating a strong performance and an extension of time to make payments. Making payments before the due date, very early, is highly recommended. The PAYDEX score is primarily used by vendors and suppliers to determine what terms will be used to extend on trade credit. Terms such as “Net 30, Net 60, Net etc.” are deadlines that a lot of suppliers will use. Reaching the highest PAYDEX Score will help you manage your cash flows better for the future.
Experian Intelliscore Plus
Intelliscore Plus is ranged from 1-100. A higher score suggests a lower risk. There are over 800 variables from public records, filings, among others that make up the complexity of the score. Most importantly, making payments on time and managing debt will reward you with score increases. There’s also an Intelliscore Plus V2 that is available.
FICO LiquidCredit Small Business Scoring Service (SBSS)
FICO’s SBSS positions businesses in ranks by how often they make payments on time. The score ranges from 0-300. Again, the higher the score, the more risk adverse you are to lenders and suppliers. The score will be used for term loans, commercial loans, and line of credit up to $350K from the Small Business Administration. The minimum score to pass the pre-screen is 140. The score can also use both personal and business credit data.
Equifax Business Risk Scores
- Payment Index – Scaled from 0-100 and is based on the business’ payment history from the previous year. The average “days past due” are principal factors in determining the score. If payments are made on time, the index score will be between 90-100.
- Business Credit Risk Score – Scaled between 101-992, this reflects the likelihood that the business will incur a 90 day or more delinquency over the following year. 566 or above is acceptable. A score of 0 signifies a bankruptcy on file.
- Business Failure Score – Scaled from 1000-1880, this predicts the possibility of the business failing over the next year. Again, higher scores are better and 0 signifies a bankruptcy.
3. What are the best tips for small business owners in getting the ideal FICO credit score?
- Keep credit card balances in the 30-40% threshold
- Have at least three trade lines open
- Always make payments ahead of time
- Keep your information up-to-date with all credit bureaus
- Borrow from lenders that report to the credit bureaus
- Never make business loan payments with personal checks or credit cards
The biggest takeaway that I want to leave you with is to use debt and make payments early! These same tips can be applied to your personal FICO Scores as well. The differences will be the tax advantages associated with small business owners. Always remember to have at least $1000 or more in a reserve account for your business in the event that you are about to be in the sunken place of debt. Use debt to your advantage, but never let debt take advantage of your business.
Karlon Johnson is the creator of Building Black Wealth, a monthly finance column promulgated in the Orlando Times newspaper, Central Florida’s award-winning African-American publication. A member of the University of Central Florida’s (UCF) Young Alumni Council, Karlon is known in Orlando-based professional circles for his numerous financial literacy workshops and has given several seminars to noteworthy organizations including Big Sisters Little Sisters of America. He has contributed thought leadership pieces to reputable publications including Home Business Magazine, has been featured on business related podcasts to offer insight regarding money management, and was recognized by UCF’s Black Student Union as the 2017-2018 Executive Board Member of the Year. Karlon earned a bachelor’s degree in finance from the university and is currently pursuing a master’s degree in business. He works in retail banking, handles credit repair for United Credit Education Services, and is an active member of Alpha Phi Alpha Fraternity, Incorporated. Visit Karlon’s Facebook business page at Building Black Wealth.