Are you ready to take your small business to the next level? Getting your business credit score in order can open many doors, helping you get approved for business loans, receive more favorable terms from lenders and suppliers and perhaps even win lucrative contracts.
But just like it takes time to improve your individual credit score, building up a good credit score for your business doesn't happen overnight — it requires thought, effort and planning. In this article, we'll provide six tips to increase your small business credit score so you can maximize the opportunities available.
What is a “good” business credit score?
A business credit score is one measure of your company's financial health and creditworthiness. It's similar to your personal credit score, but instead of assessing your individual creditworthiness, it evaluates your business's financial behavior and ability to repay debts.
Both Dunn & Bradstreet and Experian business credit scores range from 0 to 100, while Equifax’s business credit risk score ranges from 101 to 992. With every business credit rating agency, higher scores indicate better creditworthiness, increasing your chances of securing loans and getting better terms from suppliers.
6 ways to improve your business credit score
If your business credit score isn’t quite where you need it to be, here’s how to improve it.
Keep your business and personal finances separate
Maintaining a clear distinction between your personal and business finances is essential for building a strong credit score for your small business.
Keeping finances separate by opening a business checking account and having a business credit card demonstrates to lenders and suppliers that your business is legitimate and a separate entity with its own financial resources.
Establish trade lines with companies that report trades
Not all vendors, suppliers and lenders report your business's credit performance to the credit rating bureaus. So even if you make timely payments to these creditors, it may impact your business credit score.
To ensure your on-time payments count, set up loans or lines of credit with those vendors who report trades to the credit bureaus. Some vendors that offer net-30 payment terms and report to the major credit bureaus include Quill and Uline.
Use your credit lines responsibly
Once you have accounts with suppliers or lenders who report to the business credit rating agencies, make sure you use them.
In theory, having a trade account or credit line and never using it should show your business is financially healthy and has a strong cash flow. In reality, though, not using credit means you won’t have any credit history, which leaves credit rating bureaus, potential lenders and suppliers wondering whether you will make payments on time when you borrow.
So, use your credit — even if that just means paying a monthly subscription with your business credit card or ordering breakroom supplies on credit.
Maintain a low credit utilization ratio
Your credit utilization ratio measures the amount of credit you are using compared to the amount of credit available to you. You calculate it by dividing your total outstanding credit balances by your credit limits. For example, if you have a total balance of $1,000 on your business credit card and your credit limit is $5,000, your credit utilization ratio is 20%.
A low credit utilization ratio is essential for maintaining a good credit score because lenders and credit rating agencies view high credit utilization ratios as a sign of credit risk. Regularly using a large percentage of your available credit could indicate that you are struggling to manage your finances and may be more likely to default on your debts.
According to the SBA, you should keep your credit utilization ratio on active cards below 50%.
If you have revolving lines of credit with higher utilization ratios, focus on paying down those balances. You should also avoid using more than 50% of your available credit, even if you pay off the balance in full each month. You can further improve your utilization ratio by requesting credit line increases. However, it's essential to use these strategies responsibly and avoid taking on too much debt, which can harm your credit score.
Pay your creditors on time
One of the most significant factors influencing your small business credit score is your payment history. Late payments can harm your credit score and make it more challenging to qualify for loans or other forms of financing. To maintain a good credit score, you must pay all your vendors, lenders and suppliers on time.
Monitor your business credit report regularly
Regularly review your business credit report to ensure that the information reported is accurate.
Visit the websites of the three major business credit reporting agencies, and search for your company’s name. You may need to add your city, state or ZIP code to narrow your search, and you may need to create a free account to order a copy of your business credit report.
Once you have your report in hand, ensure your profile information is accurate, there aren’t any erroneous late payments or accounts in collections and there are no signs of identity theft. If you spot any errors or issues, follow the agency’s dispute process.
Taking control of your business credit score can be intimidating, but understanding how business credit works can help you stay ahead of the curve. With accurate information and reliable strategies, building good business credit is simple, and you’ll have an easier time accessing the funding you need to succeed.