Business Credit Scores: What are They?

Business credit score is vitally important for business owners. In today's tough economic environment, a low credit score can lead to higher interest rates, difficulty in obtaining loans and potential problems with suppliers. Vice versa, a favorable credit history can be an excellent way to make your company thrive and grow. It may not only save you a considerable amount of money, but also provide access to capital without your personal liability. Read about the steps necessary to build a business credit profile before you really need it.

Many business owners use their own personal credit history to obtain credit cards for business. In this case you will be personally liable for the debt if your company cannot make the payments. Building separate business credit score will let you not to use your personal guarantee. It protects your personal finances if the business fails or if you have problems with your personal credit score.

Business credit ratings are calculated similar to FICO score. They are based on several factors from your business credit report: available credit, credit card balance, late or missed payments, previous or existing legal filings.

The main credit bureaus that collect and provide business information are Dun & Bradstreet, Experian Business and Equifax Business. They gather credit obligation information from thousands of businesses nationwide, like suppliers or lenders with which you have financial relationships. Company background information is collected from various independent firms.

Credit bureaus do not collect information directly from a company about its business.

Business credit score is often used as an indicator of a company's financial health. It helps a lender decide if a business can take on additional financial obligations and pay them on time. A good business credit score let you prepare for future lending needs, extend cash flow, build up your company's reputation, lower interest rates, protects personal assets and make purchases of necessary equipment or office supplies with no personal credit check.

If you want to build solid business credit, it's better to do it before your company needs it. No financial institution wants to lend money to a business that urgently needs money. The following are the basic steps you need to take in order to build your business credit score:

1. Form a corporation or LLC to establish business credit. Sole proprietors and partnerships by definition are personally responsible for the debts that their businesses may incur. This way all your personal assets are at risk in case of litigation.

2. Get a Federal EIN for your company as well as a separate bank account under the legal name of your business. Make sure that you have all necessary licenses and permits. It will give your business more confidence when credit companies are reviewing financial foundation and business potential of your company.

3. Find lenders that will grant your company credit without a personal credit check. Make sure that they will regularly report your payments to the business credit bureaus.

4. Manage your debt wisely. If you overspend or fall into trouble making your payments, it will negatively affect your business credit score.

5. Don't forget to regularly monitor your business credit report for changes or errors.