According to a recent survey from TD Bank 69% of business owners don’t know about business credit scores or realize they even have one. Similar to a personal credit score, a business credit score is an indicator to potential lenders of the overall financial health for your business. Want to better understand your business credit score, also referred to as your Paydex score, and learn how it is calculated? Keep reading this Balboa Capital blog article for more information.
Business credit vs. personal credit.
Many small business owners use personal credit to run their business. Not only does this make you personally liable for the actions of your business, but many creditors are now relying more on business credit when evaluating business transactions. For these reasons it is necessary to understand it and utilize it for business transactions. It is important to note, however, that sole proprietors may only report to personal credit due to the nature of their business.
Calculating your score.
There are three main factors in determining your credit score. The first is your credit history, meaning your company’s payment habits, number of transactions, outstanding balances, and utilization over time. The second factor is public record. This is comprised of the number and amounts of liens, judgments or bankruptcies in your business’s name. The final factor that is used is your demographic information. This includes years in business, SIC industry, and business size.
As with your personal credit, there is a set time that items will appear on your report. Business transactions and trade data, which are essential for building business credit, will report for 36 months. Bankruptcies will appear on your report for over 9 years. Both judgments and tax liens will appear for six years and nine months.
Benefits of a strong credit profile.
Good business credit can increase your borrowing capacity. Your business will have better chance at getting business financing. Business credit can also be transferred. Which means if you were ever in the position to sell your company, a good credit profile could potentially increase the value. Having a better understanding of business credit, including how it is calculated and why you might need it, is the first step in improving your score.