How to Improve Your Business Credit Score: A Comprehensive Guide
Every small business owner knows that a company’s financial health is paramount towards its success. Your business credit score is one key indicator of how well your business is doing financially. You may be wondering why having a good credit score is actually important, or you may be wondering how to improve your business credit score.
Having good business credit is like having a high performance engine in your financial vehicle, it can open doors to better financing opportunities, offer more favorable credit terms with suppliers and increase your credibility in business. So if you are just starting out, or have been in the game a while, this guide will provide the ins and outs of business credit scores and provide strategies for both managing and improving your business credit.
Understanding Business Credit Scores and Ratings
Before we dive into Business credit scores, let’s first make sure you understand what a credit score is. (Hey there is no shame in admitting that sometimes we need the real basics!) A credit score is a numerical value that represents your creditworthiness. It basically tells others how reliable you are with money you’ve borrowed. It lets them know what their risk is if you were to borrow money from them. So it makes sense that lenders consider this number very important when negotiating the payment terms of a loan. Personal credit scores typically range from 300 to 850, but business credit scores are numbered 0 to 100. The higher the score, the better your credit rating.
What impacts your business credit score?
- Several business credit score factors influence your rating:
- Your payment history – do you pay on time, or are you sometimes late, have you ever defaulted on a loan?
- Credit utilization ratio – this is how much of your available credit you utilize.
- Length of business credit history – do you have a long history to draw data from? Or are you new to borrowing money?
- Company size and industry risk – these are factors that determine the stability of your business.
- Liens, judgements or bankruptcies – this let’s them know if you are high risk.
- Number of credit accounts and inquiries – having many inquiries might indicate your cash flow is in danger, making you a higher risk.
Understanding these elements that influence your business credit score is important when it comes to managing and improving your business credit score. For example, having a long history of paying your bills on time is a large portion of your score and therefore one should make prompt payments an essential habit of your business. Understanding that repeatedly credit inquiries also impacts your score will make you more cautious and deliberate when seeking additional sources of credit.
Why is a Good Business Credit Score Important?
Let’s talk about why it matters. We mentioned it briefly before, but maintaining a strong business credit score offers a number of benefits that impact your business’s growth potential. It’s therefore important to understand how business credit scores affect financing options. Here are the financial benefits to a good business credit score:
- Higher credit limits
- Lower interest rates
- Better payment terms with suppliers
- Lower insurance premiums
- Increased opportunities for partnerships
Maintaining a good business credit score becomes particularly crucial when you need to manage slow periods when cash flow may need a boost. When it comes time to borrow money, lenders are more likely to offer more money at more favorable terms if you have a good business credit score.
How to Check and Monitor Your Business Credit Score (And Why It Matters)
Staying on top of your business credit report to ensure it is up to date and accurate is very important. Mistakes happen, and sometimes reporting lags and isn’t as up to date as it could be. Making a habit of regularly monitoring your business credit report is a good business practice. How to check and monitor your business credit score involves working with the three major business credit bureaus:
- Dun & Bradstreet
- Experian
- Equifax
You may have to pay a nominal fee to obtain the reports from these bureaus, although some services may offer these business credit checks for free. Staying informed means you can quickly address any issues that may negatively impact your score. You want to be proactive about maintaining your business credit score and not wait for a time of need to start fixing any issues you may have missed if you’ve become lax in monitoring your credit.
Steps to Increase Your Business Credit Score
So now that you understand what a business credit score is, and how to check it, we can explore steps to increase your business credit score. Be patient. This will take time and doesn’t happen overnight. It is a process that requires consistent effort and attention to build up.
Building Business Credit
If you are just starting, here are beginner tips for building a strong business credit rating:
1. Set Up Your Business Entity
- Obtain an Employer Identification Number (EIN) by registering your business entity
- Open a business bank account
- Apply for a DUNS number from Dun & Bradstreet
Establishing a separate legal entity for your business and obtaining these essential identifiers is the first step in building a strong credit profile.
2. Pay Bills On Time or Early
This one is one that should be the most familiar to you because the biggest part of your credit score is how reliable you are at paying your debts in a timely manner. Here are some ideas to make sure you never miss a due date:
- Set up automatic payments for recurring expenses
- Pay bills a few days early when possible
- Use accounting software to track due dates
Check in on your automatic payments from time to time to make sure they are working correctly. Too many times an “auto payment” can get stuck and that could be a costly error. Paying bills on time is your number one ticket to establishing good business credit.
3. Manage Credit Utilization
Your credit utilization ratio is the amount of credit you’re using compared to your total available credit. Keep this ratio low by:
- Aiming to use no more than 30% of your available credit
- Making multiple small payments throughout the month
- Requesting higher credit limits (without increasing spending)
4. Establish Trade Lines with Suppliers
Building solid relationships with your vendors is another way to build business credit.
- Ask suppliers to report your payment history to credit bureaus
- Start with small credit lines and gradually increase them
- Maintain a history of on-time payments
5. Choose Credit Products That Report to Business Credit Bureaus
When applying for loans or credit cards:
- Confirm that the lender reports to major business credit bureaus
- Consider business credit cards designed for building credit
Business Credit Repair: How to fix your credit
If your business credit score has been damaged, consider these best ways to repair a damaged business credit score:
- Identify negative factors in your credit report
- Address any outstanding debts or collections
- Negotiate with creditors to remove negative items
- Consider working with a reputable business credit repair service
Fixing your credit once it has been damaged can be a challenge, but it isn’t impossible. First you need to identify the factors that have negatively impacted your score, then take proactive steps to address these issues. By addressing these issues right away you will set yourself back on track toward improving your credit.
Common Mistakes That Hurt Your Business Credit Score
Avoid these pitfalls to maintain a healthy business credit score:
- Missing payments or paying late
- Maxing out credit lines
- Closing old credit accounts
- Ignoring errors on your credit report
- Mixing personal and business finances
Being aware of these common mistakes can help you avoid them and maintain a strong credit profile.
The Importance of Ongoing Business Credit Management
Improving your business credit score is an ongoing process, not a one time task. That means monitoring your finances on a regular basis. Implementing these habits can set you up for long term success:
- Regularly review your business credit reports
- Set reminders for bill payments
- Reassess your credit utilization and debt levels quarterly
- Stay informed about changes in business credit scoring models
- Educate yourself and your team about best practices in business credit management
By making credit management a regular part of your business operations, you can ensure that your business maintains a strong credit profile over time.
Conclusion: Building a Strong Financial Foundation
Improving your business credit score requires dedication and consistent effort, but the payoff is worth it. Maintaining a healthy business credit score propels your potential for growth. Whether you are just starting out, or looking to improve your current credit profile, the principles remain the same: pay on time, manage your credit responsibly, and monitor your credit.
By taking control of your business credit score, you’re investing in your company’s financial future. Start implementing these strategies today, and watch as your business’s financial opportunities expand along with your improving credit score.