When starting a new business or developing the existing one, your internal financial resources may not be enough to succeed. And that’s when business owners may be surprised by not getting the expected approval from lenders. It happens mostly due to a poor small business credit score.
When a business has strong credit, it indicates its stability and overall financial health. But if your business is new, it has no credit history a creditor can assess. Therefore, it may be harder for you to get much-needed financial support. And this is also true for businesses with current credit issues. If you wonder how to improve or build a business credit score from scratch, keep reading!
What Is a Business Credit Score?
Business credit scores are representations of your company’s overall financial stability expressed in digits. From this point of view, they are similar to personal credit scores, which show an individual’s ability to handle their finances. While a personal credit score ranges from 300 to 800, business ratings use a scale from 0 to 100.
The information about business credit ratings is collected and updated by specific institutions called three major business credit bureaus. They are Dun & Bradstreet, Equifax, and Experian. Each bureau uses different scoring methods, so no single calculation formula exists. Generally, a good business credit score is between 80 and 100, while ratings between 50 and 79 are considered moderate risk.
Why Is a Business Credit Score Important?
Your business credit score is still critical even if you won’t get a small business loan. Lenders are not the only institutions that can assess your credit rating to decide whether they want to work with you. Investors, vendors, credit card companies, and landlords can also check your credit and decide based on it.
If your business has a good credit score, it opens up great opportunities for future development and growth. Such companies are more likely to find an investor and get better commercial lease terms, insurance premiums, or vendor discounts. If you secure additional financing, a good credit score is a must-have. It can help you get a lower interest rate, higher credit limit, and extended repayment terms.
Summing up, a high business credit score provides more opportunities for business owners. In its turn, a poor rating makes it more difficult to access various financial benefits.
What Factors Affect Business Credit Scores
When determining your business credit scores, the main commercial credit bureaus usually pay attention to the following factors:
- Business size
- Number of trade experiences
- Outstanding balances
- History of payments
- Credit utilization ratio
- Years in business
Is Your Personal Credit Score Important for Your Business?
If you’re a business owner, we recommend you maintain good personal credit scores, as they can play a role too. Lenders and vendors may check your credit report before deciding whether they want to work with your company. It can be essential if you start establishing business credit or if it represents a high risk.
“Even though a business score doesn’t depend on its owner’s rating, these two are still interrelated,” says Shania Branson, the founder of 15M Finance. “The business owner’s current financial situation can affect the company’s course and change its behavior. Additionally, a personal credit score is one of the indicators of an individual’s spending habits. If the business owner spends money thoughtlessly, it can also affect the business. Therefore, lenders can monitor your credit score, even regarding business loans.”
How to Check Your Business Credit Score?
Each credit bureau calculates your credit score differently. Also, lenders may not report your payments to all three bureaus. Thus, the information in each business credit report may vary. Therefore, reviewing them all is recommended to see the full picture. Here’s what you need to do to access the needed information:
Dun & Bradstreet
The procedure starts with signing up for CreditBuilder Plus products. To do this, you need to apply for a DUNS number, which makes it possible to track your credit history for the credit bureau. Additionally, this nine-digit number is required if you apply for any federal grant. After completing the procedure, you can review your credit report via Dun & Bradstreet’s free CreditSignal product.
However, this free tool only provides limited information for the previous 14 days. If you want to access the comprehensive credit report, you can get a paid version of your business’s credit monitoring. The price ranges from $62 to $799, depending on the specific credit report option you want to purchase.
To review your Experian business credit score, visit its website and purchase a CreditScore Report. One-time access will cost you $39.95. Also, you can buy a ProfilePlus Report for $49.95. This service allows you to see your payment history along with inquiry details.
Consider Experian’s subscription services if you want to check the information regularly. They will help you save money in the long run. Options like Business CreditAdvantage ($179 per year) and Business CreditScore Pro ($249 per month) can provide you with ongoing access to your company’s credit report details.
The Equifax credit report shows your credit risk score and business failure score. To order your business credit report, visit the Equifax website. One business credit report will cost you $99.95. You can also purchase a multi-pack of five for just $399.95.
7 Tips on How to Increase a Business Credit Score
Below are six steps to build business credit or boost your current score.
- Register Your Business
This is the first step you need to take to establish your business credit. Registration procedure depends on your state and business structure. For example, some states don’t require you to undergo any special registration if you operate under your name. Thus, check your state law first.
Then, turn to the IRS and apply for EIN, which is an Employer Identification Number. This number is similar to a Social Security number for individuals. It helps the government identify your business and keep track of your tax payments. Additionally, you will need this number to open a business bank account, apply for a license, and build credit.
- Separate Your Business and Personal Expenses
Your personal and business finances and expenses should be separated immediately. Thus, your company’s payment history will appear on your credit report, one of the factors determining your credit score. Start with opening a commercial bank account and putting all your company’s bills in its name.
- Check Your Business Credit Report Through Major Business Credit Bureaus
As mentioned, three business credit reporting agencies collect information about business credit scores. However, not all lenders send or check business credit profiles through all three bureaus.
Unfortunately, you never know which bureau’s records will be reviewed. Therefore, you must ensure each of your business credit reports is trimmed. Check your reports for accuracy, upload financial documents, and add trade references if needed. This will help you improve your credit score by a few points.
- Pay Your Bills on Time
Making timely payments is one of the best things you can do to boost your personal or business credit. Your business’s payment history plays an important role. It shows your financial behavior and helps creditors assess your ability to pay on time. Therefore, you must thoroughly review your cash flow and promptly cover your invoices and bills. If there are any problems with this, try to determine the reasons and move toward solving them.
If it becomes difficult for you to use manual tracking, the software can help you streamline the process. You can set an auto payment for some regular bills and expenses, such as rent, utilities, and electricity. Thanks to this, you won’t need to keep each of your bills and their due dates in mind. This will help you avoid missed payments and build strong business credit.
- Get a New Business Credit Card or Line of Credit
Another way to increase your business credit score is to get a business credit card from a company that reports borrowers’ payments to credit bureaus. Business credit cards can help show potential lenders and vendors your good spending habits. However, you need to use the new card responsibly to avoid worsening the situation.
You can create a strong history of timely payments by using small amounts and repaying them on schedule. This can boost your credit and help you increase your credit limit over time. Besides providing access to higher amounts, it will lower your credit utilization ratio.
- Keep Track of Your Credit Utilization Ratio
Building strong business credit is impossible if you ignore factors that affect your rating. A credit utilization ratio is a criterion that make up your overall score. But what is it, and how does it impact your score?
Credit utilization is calculated by dividing the amount of credit you’ve used by the credit balance available to your business. A low credit utilization ratio shows that your business manages finances and responsibilities well. If you’re on top of your existing credit accounts, it may indicate that your business is overburdened with debt. Thus, lenders may not want to provide you with business financing.
Your credit utilization ratio drops under several circumstances. First, it happens when you regularly pay off your credit card balances. Second, it decreases when your credit card company increases your credit limit.
- Make Debt Consolidation
Consolidating your debts means taking out one loan to cover all your existing ones. This way, you combine all your current credit balances into one. However, debt consolidation is not always effective. It can provide a credit boost only if you use the new loan to pay off your credit card balances, decreasing your credit utilization ratio. Additionally, you must fulfill your new debt payment obligations on time.
Debt consolidation can also help you reduce the financial burden if you get a new loan at a lower interest rate. This can free up some money and provide a great boost for your business credit score in the long run.
Building business credit is a must-do to access various financial benefits and opportunities. Whether you’re an experienced entrepreneur or a new business owner, our advice will help you improve your business credit or establish it from scratch. Remember that building strong credit doesn’t happen overnight and requires ongoing efforts.