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Business creditors use a system of credit that is very similar to personal credit scores. Like personal credit scores, business credit is built largely on a foundation of timely payments to creditors, the amounts of repayment, and the number of credit lines that one has. However, there are a few factors that distinguish the business credit score from personal credit scores, which we will get into here.
First of all, business credit cannot be immediately established. Because it represents the creditworthiness of a fictional legal entity, business credit scores require a number of steps to create the business so that the score can then start becoming generated. A business must be either incorporated, or have an LLC formed around it. The corporation or LLC must then be registered with a federal Employer Identification Number (EIN) so that it can be properly identified by the IRS. A number of state-specific forms and fees must be signed and payed. The business then needs a telephone number and bank account registered in its name, and a few lines of trade opened up. Once the business is created, you can then register it with Dun & Bradstreet, Experian or one of the other business credit reporting companies, and the credit building process begins.
Unlike personal credit, business credit scores are based on a scale of 0 to 100, with 80 being considered excellent. The Paydex score by Dunn & Bradstreet is considered the most comprehensive score, somewhat equivalent to the Fair Isaac score that personal credit uses.
Business credit is also not weighted as strongly on creditor repayment as personal credit is; rather, more emphasis is placed upon the profitability of the business, stability, and how long it has been in existence. Business creditors are more interested in the power of a business, not just whether the proprietors are paying their bills on time.
Business credit also makes business owners eligible for many benefits that are similar to their personal credit equivalents; these include cash advances, lines of credit, credit cards, and of course conventional loans. Interest rates are based along the same prime rates, and are kept low through bank competition.
