Most consumers in Canada are aware that they have a personal credit score and report. However, did you know that business owners in Canada may also have a business credit score and report? If you are a business owner in Canada, it’s important to understand how your business credit can affect the success and growth of your company.
Key Points
- A business credit score is a numerical rating that assesses a company’s creditworthiness based on its financial history and credit activity.
- You may have multiple credit scores, as there is more than one credit bureau, each of which may have slightly different information about your financial activity.
- To maintain a healthy business credit score, be sure to pay all bills on time, maintain a low credit utilization ratio, and keep accurate records.
What Is A Business Credit Score In Canada?
Business credit scores and reports measure creditworthiness, similar to the way personal credit scores do. Lenders, suppliers, and creditors use these scores to evaluate a company’s financial stability and potential credit risk.
Do Lenders Use Your Business Credit Score Or Your Personal Credit Score?
Unless your business has been operating for several years and has an excellent credit score, potential lenders will often also check the personal credit scores of business owners in addition to the business credit score.
Depending on the age of your company, legal structure, financial track record, and the loan type, lenders may assess your business credit score, personal credit score, or both.
Typically, lenders focus on your business credit score in the following scenarios:
- Your business is a corporation
- Your business has an established and independent credit history
Because potential lenders will likely check your personal credit score, it is good practice to maintain a high credit score. You don’t want to give potential lenders a reason to turn your business away from financing or favourable loans.
| Note: Usually, lenders will ask for a personal guarantee when applying for financing for your business. A personal guarantee means that you are still responsible for the loan even though it is in the company’s name. |
Can You Check Your Business Credit Score?
Yes, you can check your business credit score. In fact, it’s highly recommended that you do so to ensure credit health and understand your ability to secure a business loan.
You can check your business credit score from the following sources:
TransUnion
To get your TransUnion credit score and access your Small Business Credit Report, contact them by completing their online contact form. This report includes the following information:
- Payment patterns
- Authorized credit limits
- Outstanding balances
- Operating credit lines
- Overdraft protection products
Equifax
The Equifax Business Credit Report provides a detailed snapshot of a company’s financial health, credit behaviour, and risk profile. Lenders, suppliers, and partners use it to assess creditworthiness.
You can purchase a one-time copy of your credit report.
In addition to your company’s business credit score, the report contains important information about a business, including the following:
- Business identification details
- Predictive risk scores
- Delinquency scores
- Bankruptcy risk indicators
- Payment history trends
- Financial trade data
- Number of accounts, delinquencies, charge-offs
- Liens and collections information
Dun & Bradstreet
Dun & Bradstreet provides information on a company’s financial health, creditworthiness, and potential risks. This company maintains your business’s PAYDEX score, a dollar-weighted metric that reflects how reliably your company has paid its bills in the past. Scores range from 1 to 100.
To access your company’s PAYDEX score, you’ll need to subscribe to a credit monitoring service. Information contained within your report from Dun & Bradstreet includes the following:
- Payment history
- Delinquency predictor score assesses your risk of late payments
- Failure score to predict the likelihood of bankruptcy or closure
| Note: Business Credit Scores Are Public With personal credit scores, authorization must be obtained from the individual in question before a credit score can be checked, due to consumer protection regulations. These regulations do not apply to businesses, which means that anyone can check your business credit report, so long as they pay the necessary fees. This can be a good thing for your business, especially when placing a large order with a new supplier or shipping a big delivery to a new customer. Reviewing their credit report allows you to assess whether they pay bills on time, have a history of making timely payments, and are financially stable. |
How Are Business Credit Scores Calculated?
Your business credit score calculation varies depending on the provider.
For example, Equifax gathers data from a wide range of sources, including banks, credit unions, auto finance companies, industry credit groups, collection agencies, lien databases, and the courts. This information is then compiled into reports that Equifax uses to calculate business credit scores.
| Note: Your Business May Have Multiple Credit Scores In Canada, the main credit bureaus for businesses are Equifax, Dun & Bradstreet, and TransUnion. Each credit bureau uses a different method of calculating your score, which means that your business will have multiple scores. In addition, the credit bureaus use different types of credit scores. For example, Equifax has a score for credit risk, business failure, and payment index. |
What Is On A Business Credit Report?
The breakdown of a business credit report is somewhat different from a personal credit report. Business credit reports are also more complex than personal credit reports, with sections typically including the following.
- Business Information: The company’s legal name, address, and phone number are displayed here. There is also a section with additional business information, such as the number of employees and sales volumes.
- Score Summary: This section uses visual graphs to display a brief summary of the business’s score. Below this section, there is another section which highlights details of the report, such as the number of accounts, credit limits, number of collections, the number of legal items, and various other details.
- Score Details: This section deep dives into the factors that are used to calculate the credit score.
- Industry Summary: To better understand the company’s activity, information about the company’s industry is provided in this section as a benchmark.
- Company Details: This section has very detailed information about the business, such as returned cheques, accounts in collections, legal information, inquiries, and banking, among many other details.
How To Build A Good Business Credit Score
A similarity between business and personal credit scores is that they take time and effort to build.
Here are a few steps to take:
Understand Business Credit Scores
Before building your credit, it’s important to understand what criteria credit bureaus consider. In general, they aim to answer the following questions:
- What do you owe right now?
- How much credit are you currently using?
- How timely have your payments been?
- What is the industry and the age of your company?
Separate Your Finances
Regardless of whether your business is incorporated or a sole proprietorship, having separate finances for personal and business purposes is essential. By maintaining separate business accounts, you can ensure that your business credit score is clean, accurate, and accurately represents the business’s activity, not your personal activity.
You don’t want the business activity interfering with your personal score, and vice versa.
Open Business Credit Accounts
Now that you’ve separated your finances, it’s time to open up credit accounts and lines of credit for your business. By using credit accounts wisely, you can establish your company as a trustworthy borrower. As with personal credit scores, the better you manage your credit, the more financially stable and ideal for lending you will be considered.
Pick Vendors Wisely
You want to choose lenders that report to the credit bureaus so that your on-time payments work towards building good credit. If you’ve already opened an account with a vendor and they don’t report to the credit bureaus, consider switching to a vendor that does.
Always Pay On Time
As with personal credit scores, the better you are at paying on time, the better your credit score will be. The same applies to business credit scores. Payment history carries the most weight in credit score calculations.
Maintain Accurate Information
Checking your business credit score and report will help you identify errors. If you spot any, report them to the credit bureau immediately and have them fixed. This is important for your business credit score because it can reveal possible fraud that is occurring and ensure that lenders do not turn you down due to inaccurate information.
Any time your information changes, be sure to update the credit bureaus so that anyone viewing your credit report will have the most up-to-date information.
Final Thoughts
Business credit scores and reports are an important factor in the growth and success of your business. Not only are they beneficial for growth, but they are also a helpful tool to use when doing business with other companies and when applying for additional funding. If you’re interested in learning more about your business financing options, Loans Canada can help!
