Business Credit Score – Definition

Cite this article as:"Business Credit Score – Definition," in The Business Professor, updated December 2, 2019, last accessed October 20, 2020, https://thebusinessprofessor.com/lesson/business-credit-score-definition/.

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Business Credit Score

A business credit score refers to a number that measures the business’ creditworthiness. It determines whether a business qualifies for a loan. The calculation of a business credit score is based on a number of factors like the business’ financial position, including its financial risk level.

The range of a business credit score is between 0 to 100, where 0 represents a high risk, while 100 represents a low risk. In other words, when the number of credit score is high, the better the chances of receiving funds from a financial institution.

A Little More on What is a Business Credit Score

One major factor that financial institutions will consider before giving out a loan to a borrower is the business credit score. If the borrower is big business, the lender will look at its revenue, assets, profits as well as liabilities to determine whether it qualifies for a loan.

For small businesses, the lender checks the credit score of the business as well as the owner. The reason for doing this is that there is a close relationship between a small business and personal finances.

There are three main business firms that deal with credit scoring. They include Equifax, Dun and Bradstreet, and Experian. Note that these firms’ methods of scoring differ slightly.

For instance, consumer credit scores follow a standard scoring, which ranges from 300 to 850. On the other hand, the range of business credit scores 0 to 100. Regardless of which method is in place, a business can only have a good credit score under the following conditions:

  • If it is able to settle its bills in good time
  • If it distances itself from legal problems
  • It is able to minimize its debts

Generally, a business credit score can have an impact on your ability to access a loan for your business. Note that a credit score forms only a section of a loan acquisition process. There are also other things that a lender will put into consideration.

The lender will also look at some other factors such as cash flow, and how long the business has been in operation. All these are factors that a lender will use to determine whether or not your business qualifies for a loan.

How a Business Credit Score Works (Example)

Here is Company A that wants to do business with Company B. For this reason, Company A wants to know Company B’s financial status so that it can determine its ability to pay in full its invoices once they are in business. To be able to do this, Company  A will first want to look at its business credit score history to see if its supplier payment history is strong. Company A can also do a subscription purchase service and use it to monitor the credit score of Company B on an ongoing basis.

Why is a Business Credit Score Important?

It is important to have a clear understanding of your credit score as well as the role it plays when it comes to obtaining a loan. A credit score may be beneficial in the following ways:

It will make it easier for your business to get financing. All you need to do is to ensure that you establish a strong business credit score. This will help increase your ability to access a loan and ate favorable terms.

It will help lower rates on insurance policies. Note that when you have a good credit profile, it creates a layer that separates your personal and business finances. It makes it easy to track expenses in your business.

Finally, it will increase your power of borrowing. Ii means that if your credit score is high, you will be able to secure a huge loan for your business.

Why Creating a Good Credit Score may be Challenging

The following statements explain why building a good credit score may be challenging:

  1. It takes a long time to be able to establish a business or personal credit history.
  2. It is easier to influence and make an improvement in your credit score, but it is difficult to make changes to it. The reason is that you cannot obtain a credit score on your own, but an external rating agency gives it to you.
  3. Keeping internal records as well as monitoring small business’ credit score requires a lot of time and patience.

What does a Business Credit Score Report Contain?

A business credit score report may contain the following:

  • Business credit summary and scores
  • Corporate registration as well as contact information
  • Information on banking, leasing, and insurance
  • Major facts about the business
  • Collections and payments summaries
  • Bankruptcy filing
  • Tax lien filings
  • Filing information on Uniform Commercial Code
  • Judgment filings

Key Takeaways

  • A business credit score refers to a number that measures the business’ creditworthiness
  • One major factor that financial institutions will consider before giving out a loan to a borrower is the business credit score
  • The range of a business credit score is between 0 to 100, whereby 0 represents a high risk, while 100 represents a low risk
  • There are three main business firms that deal with credit scoring. They include Equifax, Dun and Bradstreet, and Experian
  • A credit score forms only a section of a loan acquisition process as there are also other considerations such as cash flow and the duration of the business has been in operation.

Reference for “Business Credit Score”

https://www.nerdwallet.com/blog/small-business/business-credit-score-basics/

https://www.nav.com/business-credit-scores/

https://www.nerdwallet.com/blog/small-business/business-credit-score-basics/

www.experian.com/small-business/business-credit-reports.jsp

https://www.investopedia.com › Personal Finance › Credit

Academics research on “Business Credit Score”

[PDF] Improving Access to Credit of SME’s in Puerto Rico: Exploring Variables to Forecast Small Business Loan Events, López, A. S. (2007). Improving Access to Credit of SME’s in Puerto Rico: Exploring Variables to Forecast Small Business Loan Events. Puerto Rico. University of Turabo. Access to small business finance plays a significant role in the development of entrepreneurial activity of regions. Although the importance of finance institutions is well recognized in entrepreneurship literature, lending to small business remains a complex and uncertain activity as numerous factors influence performance of these firms and consequently the entrepreneurs’ capacity to comply with financial obligations. Using the literature on business finance, the study attempts to create an objective model that will allow us to evaluate SMEs loan performance. Furthermore, contrasting perspectives of finance theory and small business credit score literature will provide insights into significant variables that should be considered when evaluating small business loan applicants. The development of this model will advance our understanding of the factors that predict default risk of small business loans and therefore can help improve access to credit by small and opaque SMEs.

[PDF] Small business lending and social capital: Are rural relationships different, DeYoung, R., Glennon, D., Nigro, P., & Spong, K. (2012). Small business lending and social capital: Are rural relationships different. University of Kansas Center for Banking Excellence Research paper1.

Testing for racial bias in business credit scores, Robb, A., & Robinson, D. T. (2018). Testing for racial bias in business credit scores. Small Business Economics50(3), 429-443. We develop a novel empirical test of racial bias based on comparisons between forward-looking, expectations-based credit scores and backward-looking, repayment-history-based credit scores. We then test for racial bias using confidential-access data from the Kauffman Firm Survey. Businesses founded by disadvantaged minorities have much lower average business credit scores, but these scores show no evidence of racial bias. If anything, forward-looking credit-score models under-predict the rate of payment delinquency among minority-owned businesses.

Why were banks better off in the 2001 recession?, Schuermann, T. (2004). Why were banks better off in the 2001 recession?. In a sharp turnaround from their fortunes in the 1990-91 recession, banks came through the 2001 recession reasonably well. A look at industry and economy-wide developments in the intervening years suggests that banks fared better largely because of more effective risk management. In addition, they benefited from a decline in short-term interest rates and the relative mildness of the 2001 downturn.

How Wise Are Crowds? A Comparative Study of Crowds and Institutions in Peer-to-Business Online Lending Markets, Mohammadi, A., & Shafi, K. (2017). How Wise Are Crowds? A Comparative Study of Crowds and Institutions in Peer-to-Business Online Lending Markets. Swedish House of Finance Research Paper, (17-10). Funding small businesses used to be the exclusive domain of angel investors, venture capitalists, and banks. Crowds have only recently been recognized as an alternative source of financing. Whereas some have attributed great potential to the funding provided by crowds (“crowdfunding”), others have clearly been more skeptical. We join this debate by examining the performance of crowds to screen the creditworthiness of small and medium sized enterprises (SMEs) compared with institutions in the context of new online peer-to- business lending markets. We exploit the randomized assignment of originated loans to institutions and crowds in the online peer-to-business platform of FundingCircle, and find that crowds underperform institutions in screening SMEs, thereby failing to lend at interest rates that adjust for the likelihood of defaulting on a loan. The interest rates set by crowds predict default 39% less accurately than institutions. Moreover, the underperformance gap of crowds compared with institutions widens with risky and small loans, suggesting that crowds lack the expertise to assess the risks or the incentive to expend resources to perform due diligence. Overall, our findings highlight when crowds face limitations in screening SMEs.

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