What is Business Credit?

what is business credit

Estimated reading time: 2 minutes

Many business owners do not know about business credit scores or realize they even have one. So, what is business credit? Similar to a personal credit score, it is an indicator to potential lenders of the overall financial health of your business. This Balboa Capital blog post can help you better understand your business credit score, also referred to as your PAYDEX® Score. It also explains how your credit score is calculated.

Business credit vs. personal credit.

Many small business owners use personal credit to run their businesses. Of course, this makes you personally liable for the actions of your business, but also, many creditors are now relying more on business credit when evaluating business transactions. Therefore, it is necessary to understand it and utilize it for business transactions. However, it is essential to note 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 comprises the number and amounts of liens, judgments, or bankruptcies in your business’s name. The final factor is your demographic information, including time in business, SIC industry, and business size.

Reporting overview.

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 statement for over nine years. Both judgments and tax liens will appear for six years and nine months.

Benefits of a strong credit profile.

A good credit profile can increase your borrowing capacity. As a result, your business will have a better chance of getting business financing. Credit can also be transferred. This 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 credit, including how it is calculated and why you might need it, is the first step in improving your score.

Balboa Capital, a Division of Ameris Bank, is not affiliated with nor endorses PAYDEX. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.