“Know your credit score.” It’s a common refrain in the realm of personal finance. But did you know your personal credit can also impact your business?

Business credit is built over time. Many small businesses have not been in operation long enough to develop a complete and accurate business credit score. Because lenders and credit bureaus aren’t required to report business lending activity, a business can be open for years and still not have much business credit. However, most small business owners have an extensive personal credit history. Lenders often will use a personal credit score to determine what types of loans a small business will be offered, along with the interest rates and terms associated with those loans.

What Do Lenders Look For?

In addition to reviewing your personal credit score and history, lenders will look at a variety of metrics when evaluating a business loan request, including your overall financial statements, current debt-to-credit ratio and the size of your loan request. They will focus on the cash flow of your business and will delve into the daily balances and transaction details in your business bank account.

Building Business Credit

Business credit reports are based on business demographics, public records, trade payment history, financial payment history, corporate family trees and other information including the owners and guarantors associated with the business.

Building a strong business credit score over time can help you get the most capital with the best rates and terms to help you grow or expand your business. It can help you get the money you need to keep your business afloat in bad times too. It is also useful when applying for trade credit from a trade vendor, which can help your business maintain a healthy cash flow.

Even if your strategy is to cover all your business costs by using cash on hand and avoiding loans and credit entirely, business credit can be useful. For example, because your business credit is accessible by the public, a strong business credit score can encourage clients, suppliers and partners to work with you.

A poor business credit score may eliminate some loan options and make remaining options more expensive and less appealing. It also may make your business less appealing to potential business partners and suppliers looking for financially stable business relationships.

Check Your Business Credit Score

It’s not uncommon for the data in your business credit report to be incorrect, so be sure to check it regularly. Unlike with free personal credit reports, you’ll need to pay to check your business credit report.

Business credit scores typically range from 0-100 (instead of 300-850 in personal credit scores). Each of the three primary credit bureaus collects, analyzes and verifies information differently:

• Experian provides a Credit Score report, which is a combination of a business credit score and payment trends, account histories and public records.
• Equifax’s payment index reflects your amount of on-time payments. Equifax also has a credit risk score, which focuses on the chances of your business becoming severely delinquent on payments. A business failure score determines the likelihood of your business closing.
• Dun & Bradstreet calculates a PAYDEX score to recommend how much credit a lender should offer you. Their credit score (with grades from 1 at the high end to 5 at the low end) compares your company against others with similar payment histories. Their financial stress score (also ranging from 1 to 5) provides a broader picture, evaluating your business against a variety of metrics, including size and payment delinquency.

Better Credit for Better Business

Keep in mind that while having a strong personal credit score is important, it isn’t enough to secure a good business credit score. And leveraging your personal credit to support your business credit can damage your personal score if your business struggles.

You can improve your business credit score by keeping your business as financially healthy as possible. Be timely with your payments. Don’t use all your available credit unless necessary.

Do you know your business credit score? Is it less than ideal? Be sure the credit bureau has up-to-date evidence of your payments to vendors. You can contact the bureau or your vendors to do this. You should also begin to adopt new credit habits by minimizing outstanding debt, avoiding overextending your business and making sure you only apply for credit when needed. Your credit score is based on long-term payment patterns, so it may take some time to get a bad score moving in the right direction.