Corporations also possess credit ratings!
In the world of business financing, understanding your credit score is crucial. One system primarily used to pre-screen applicants for SBA 7(a) loans, the Small Business Administration's most popular form of business financing, is the FICO SBSS scoring system.
This system relies on information from the three major business credit bureaus in the United States: Dun & Bradstreet, Experian Business, and Equifax Small Business. These bureaus score business credit on a 0-100 scale, with higher numbers associated with less risky investments for lenders.
However, a 2015 survey revealed that 72% of small business owners were unaware of where to find information about their business credit score, and an even higher percentage were unsure of how to interpret it.
So, what exactly goes into a business credit score? Like personal credit scores, business credit scores factor in payment history, the age of credit accounts, and the amount of credit utilized. But they may also take into account factors unique to businesses, such as the amount of capital a business owner has personally invested in the company.
The success of a business in the current market conditions may also impact its credit score. Lenders may view a business owner who is personally financially responsible and has reasonably invested in the business as a safer bet. Additionally, the personal credit score of the business owner may be considered when determining a business's credit score.
It's important to note that there is no universal scoring model for business credit. The Fair Isaac Corporation uses information from the three major bureaus to create its own score for small businesses, referred to as FICO SBSS. This system ranges from 0-300.
A good business credit score can help small businesses qualify for financing to expand their business. Conversely, a low business credit score can make it more difficult for businesses to negotiate favorable payment terms or secure the amount of financing they seek.
To stay on top of your business's credit score, it's recommended to regularly check your credit reports with agencies such as Schufa (where you have the right to one free annual report), and use free self-assessment tools like those offered by Gründerberater.de to evaluate your creditworthiness and legal form. Additionally, understanding key financial ratios like liquidity ratio and payment duration through financial dashboards provided by digital accounting software or tools like Klipfolio or Databox can help you gain transparency into your business credit status and financial health.
As of this year, over $28 million in SBA 7(a) loans have already been approved. With the right knowledge and preparation, your business could be next.
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