Establishing and maintaining good credit for your small business can help you secure low-interest loans and to negotiate favorable terms with your suppliers. A good credit rating also can help you attract new business, since potential clients may check you business score as a way to gauge your reputation and your credibility.
What is a small business credit score?
Just as you have a personal credit score if you have personal charge cards and a personal loan history, your business has a business credit score. Instead of measuring an individual’s credit worthiness, however, a business credit score measures a company’s credit worthiness.
A business credit score differs from a personal credit score, or FICO (Fair Isaac Corporation) score, in that it uses different algorithms that relate to business risk factors. Business credit score algorithms do not follow an industry standard, and they can vary from bureau to bureau.
Although, as a consumer, you have the right to view your personal credit reports without charge each year from the three major credit bureaus – Equifax, TransUnion and Experian – you must pay to see your small business report and credit score. Another difference is that while only you and potential creditors can see your personal credit report, anyone can view your company report if they pay the bureau’s fee.
The distinction between public and private information can blur, however, when it comes to small business credit reports, since many lenders consider your personal credit rating when extending credit to you as a small business owner.
There are several business credit reporting agencies, with Experian, Equifax and Dun & Bradstreet serving as the major agencies. Each agency uses its own system for collecting and verifying your business data, but they all use information from banks, vendors, business credit card issuers and data-gathering groups.
They then use this data to create a score that determines your company’s credit risk factors or the likelihood you will repay a business loan. Typically, they examine these factors:
- size of company
- structure of business
- outstanding balances
- payment records
- credit history
- industry risk
- credit utilization
- public judgments, liens or bankruptcies
Now that you know what your business credit score is, here are some steps for building and maintaining a healthy one:
Keep Your Company Profile Up-to-Date With the Three Major Credit Bureaus
Check your business credit report quarterly to update information and to check its accuracy. Their websites are at the end of this article.
Unfortunately, the report data can be incorrect or out of date. Regularly update your basic business information, such as how long you have been in operation and your number of employees and upload updated financial statements. Correct any errors by contacting the bureaus and by providing documentation that their information is incorrect.
Establish Company Credit
If you have not already done so, apply for a business credit card. Look for one that offers rewards or cash back as an incentive. Then pay your bill in full and on time to establish a good credit history.
You also can build your business credit with your suppliers. Many vendors will extend credit to you on your orders, and these well-managed relationships will build your credit worthiness.
Choose vendors that report to the main credit bureaus and/or request that they report your prompt payment history to the credit bureaus.
Pay Your Bills in Advance
Some creditors give discounts for early payments, so this strategy helps your credit score and your wallet at the same time.
Dun & Bradstreet reserves its perfect scores for companies that pay their bills ahead of schedule. If your vendor does not report your outstanding payment record to the credit bureaus, Dun & Bradstreet allows you to include trade references with your company file.
Consider Your Credit Utilization Ratio
Be careful not to max out your credit at any one time, as it will have a negative impact on your score. Lenders see a high utilization rate as a risk factor. Aim to keep your credit utilization at under 30 percent, so that you show lenders that you can manage your debt.
Request a Credit Limit Increase
After six months, you usually can request a credit amount increase on your credit card. By increasing your limit, you lower your credit utilization ratio and therefore you can improve your credit score.
Keep Your Business Lean
How you manage your business is revealed in your credit score. When you keep your inventory low, reduce worker hours when business is slow and keep equipment in good repair, you are better able to pay your bills on time.
Any public judgments, such as liens and bankruptcies, show up on your business credit report, and they have a big impact your score. Additionally, your potential customers can view this information.
For example, bankruptcies remain on your Experian credit score for nearly 10 years, and tax liens, judgments and collections remain on your Experian credit score for about seven years.
Have a Professional Image
Loan officers do their homework, and one of the first things they do is view a company’s website. When you maintain an attractive, up to-date website, it shows lenders that your small business is professional and is a serious business. Similarly, make sure that every aspect of your online presence reflects a professional image, including any social media accounts.
Maintaining a healthy business credit score is an important part of running a successful small business. Not only will a strong score help you gain financing when you need it, but it will help you gain new business. Here are some websites to help you: