Understanding Your FICO Small Business Credit Score

You probably already have a personal (Fair Isaac Corporation) FICO score, but did you know your business has its own credit score, too? A small business credit score signals to lenders, suppliers, and potential investors that you are trustworthy and capable of managing your finances.

You’ll need a solid credit score if you wish to secure a loan on favorable terms, such as a lower interest rate and a longer repayment period. A poor credit score yields less favorable outcomes.

Business credit history is reported under your business name.

Unlike your personal credit score, your business credit score focuses on your business’s credit activities. But before any business credit reporting agency can determine a business credit report or score, you must ensure that your business is properly formed as a legal entity—such as an LLC, partnership, or corporation.

Your business needs an Employer Identification Number (IEN to establish a business credit report.

For the Internal Revenue Service (IRS) and business credit bureaus, your business entity is its own person. Your EIN is like your company’s social security number, used to track your business’s financial history and allow you to open a business bank account or secure a loan.

Personal credit scores and small business credit scores can interact with each other.

Until your business credit profile is established, your credit score is used in small business lending decisions. You may need to maintain good personal credit to secure business financing. Conversely, defaulting on business loans can negatively impact your credit score.

The average credit score for small businesses in the United States is 49 out of 100.

That means the majority of businesses in the United States are not prioritizing credit standing. By gauging your standing compared to your peers, it’s easy to see what you need to change to secure better financing options and credit terms.

Business credit scores come from the FICO Small Business Scoring Service (SBSS).

The SBSS scoring system takes into account various factors to determine credit risk, such as the following:

  • Financial history
  • Credit utilization
  • Payment history
  • Age of the business
  • Industry of the business
  • Size of the business

The SBSS considers all these factors and assigns a score between zero and 300. The higher the score, the more likely the borrower will be able to pay back the loan.

Credit checks can be “hard inquiries” or “soft inquiries.”

When you apply for credit or a loan, the lender will usually check your credit history to determine your creditworthiness. This credit check can be either a “hard inquiry” or a “soft inquiry.”

  • A hard inquiry occurs when you run a live credit application. This type of inquiry can lower your credit score by a few points and stay on your credit report for up to two years. Hard inquiries are typically used when you are applying for a loan or credit card and indicate to other lenders that you are actively seeking credit.
  • A soft inquiry is a type of credit inquiry that does not affect your credit score. Soft inquiries are typically used for informational purposes, such as pre-approved credit offers, background checks, and credit monitoring services. They do not indicate that you are actively seeking credit and will not appear on your credit report or affect your credit score.

Check for loan eligibility without harming your credit.

There are many online services you can use to access “soft pulls”—personal credit reports that indicate whether your business qualifies for a line of credit. The report doesn’t include your FICO score, but it does give you a breakdown of your credit history.

Simple mistakes can damage small businesses’ credit scores.

A poor credit score reduces your business’s ability to scale operations. Why? Because it takes capital infusion, usually obtained through loans, to fund expansion efforts. Here are six mistakes you should avoid if you want to see future growth.

  1. Late payments can significantly affect your credit score, indicating financial instability to lenders and credit bureaus, who may hesitate to extend credit or offer favorable loan terms in the future.
  2. High credit utilization indicates to lenders and credit bureaus that the borrower may not be able to handle additional debt responsibly, which can harm your credit score.
  3. Mixing personal and business finances can make it difficult to track expenses accurately and blur the line between personal and business credit. It is crucial to keep these finances separate.
  4. Applying for too many loans or credit cards in a short period can signal to lenders that you are experiencing financial difficulties. Every credit application results in a hard inquiry on your credit report, signaling that you’re applying for multiple loans. If you do this too often, your credit score can drop.
  5. Closing old credit accounts, especially those with a long history of on-time payments, can harm your credit score. Credit age is an essential factor in calculating your credit score, and closing old accounts can shorten your credit history, which can negatively impact your credit rating.
  6. Ignoring errors on your credit report can hurt your credit score. You must check your credit report regularly to ensure all the information is accurate. If you find any errors, you should dispute them with the credit bureau to have them corrected. You can identify errors or potential issues by monitoring your credit score with a free credit report.

If you maintain a healthy credit score for your business, you can fund the growth of your business and acquire that funding on reasonable terms and low interest rates. The key is to take action now.

Improve your credit score, fund your business, and attract investors.

Schedule a discovery call, and we can talk about the value of CFO services for growing small businesses.

Talk soon,
Jeremy A. Johnson, CPA

Meet the Author
Jeremy A. Johnson, CPA, is an expert in strategic tax planning, accounting, CFO services, and thought leadership.

Jeremy writes for small business owners who need actionable information on tax strategy, efficient accounting practices, and plans for long-term growth.

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