According to a recent survey from TD Bank, 69% of 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. Not only does this make you personally liable for the actions of your business, but also 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. 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, which includes time 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 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 at 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.