This article discusses the following:
- Understanding business credit scores
- How to get a business credit score
- How to build business credit
- How to use your business credit
- Applying for business credit
- Using your business credit to manage cash flow
- Improving your business’s credit rating for fast funding
No matter what stage you’re at in your company growth, whether you are just getting started with your small business or you’re established and ready to expand, your business credit score plays an essential factor in how much you’re able to grow. Without strong credit, you won’t have access to funding sources that you may need to take advantage of an opportunity, or to climb out of a temporary hole. In this article, we’ll discuss ways you can increase your business credit score so you can access fast funding when you need it.
Understanding Business Credit Scores
Before learning how to improve your business credit score, it might be helpful to understand what it is and what factors influence it.
You are probably already familiar with your personal credit score. But a personal credit score doesn’t work quite the same way as a business credit score.
Your personal credit report is linked to your social security number, personal finances, and personal credit history. Three major credit bureaus – Experian, Equifax, and Transunion – curate your personal credit history and assign a number that becomes your FICO score.
While personal credit scores and business credit scores are similar, there are a few differences. Instead of your Social Security Number, your business credit score is linked to your Employer Identification Number, or EIN. This credit score is also computed by three credit agencies, but while Experian and Equifax report business credit, Transunion doesn’t. Instead, an agency called Dun & Bradstreet does, and they only report on business credit.
Plus, there’s another business credit score that not many people are aware of called the FICO-SBSS score. It’s used by SBA lenders to determine whether or not they will approve a business loan.
How do I get a business credit score?
The first step in getting your business credit score is to apply for an Employee Identification Number. This is also a good time to consider incorporating your business or forming a Limited Liability Company (LLC). This will establish your small business as a separate and distinct business entity. Applying for your EIN is like getting an SSN for your company and enables credit agencies to tie your credit history to your distinct entity.
From there, you’ll need to engage in activities that trigger your credit in credit agency records, for example:
- After getting an EIN and incorporating your business, open a business bank account in the business’s name, not your personal name.
- Then get a phone line dedicated to your business and list it under your business name.
- Finally, you’ll want to get a D-U-N-S number through Dun & Bradstreet. You can do this by registering with them.
Once you’ve done these things, it’s time to begin the process of requesting credit for your business.
Applying for business credit
You can build credit by applying for a business credit card and establishing trade lines with your vendors to work with you on payment terms. This will allow you to make payments after you get your inventory.
You’ll want to use vendors who report payments to the credit agencies. Of course, you’ll want to pay the vendors on time, but paying them earlier than your due date is better. It will get you a higher PAYDEX score when you do. But to even have a PAYDEX score, you’ll need at least three tradelines.
Another thing to consider is to use your business credit card to manage your business’s cash flow.
Once you have lines of credit and business loans, you’ve begun the process of building business credit.
When timely payments are reported to the credit bureaus, you’ll have a stronger business credit report that will encourage lenders and suppliers to extend credit to your business. A favorable report can also help you increase your credit limit and get lower interest rates.
On the other hand, any late payments can give you a bad credit score and make it harder to secure financing.
Here’s a look at how each credit agency formulates your business credit score:
Experian looks at data from your vendors and lenders who have given you a business loan or a business line of credit. It looks at your payment history, credit ratio, how long you’ve been in business, public records that show any bankruptcies or liens tied to your business, and more. Then it assigns a score ranging from 1 to 100 on your business credit report.
Equifax determines your credit score much in the same way as Experian. It also includes demographics about your business and industry. Equifax then scores your business from 100 to 992. Unlike the other two credit reporting agencies, Equifax also considers a business owner’s personal credit score when determining a business credit score.
Dun & Bradstreet
The Dun & Bradstreet bureau only reports on business credit relationships. For this reason, any potential vendor or supplier is more likely to look at D&B’s business credit report when considering offering your business credit before they’ll look at the other two.
D&B also looks at the one-year payment history of your business’s credit accounts, your industry’s data, public records relating to your business, and other data to form their credit scores. The most utilized of these scores is the PAYDEX score, which reflects how well you’ve stayed up-to-date on paying your bills to vendors who report to the agency.
D&B uses a 100-point score and calculates a Financial Stress Score, which predicts how likely a business will go bankrupt in the coming year.
And as already mentioned, unlike with the other agencies, you can register your business directly with D&B.
With any of the credit agencies, a good credit score shows lenders and suppliers your creditworthiness. A higher business credit score correlates with a lower risk for a vendor or lender to extend credit to your business. Therefore, you’ll want to strive to have the highest business credit score possible.
What can I use my business credit for?
The primary purpose of having strong business credit is to improve your eligibility for a small business loan, either through the SBA or another lender. But there are other things your company’s credit can impact, including:
- The rate on any business loans or line of credit you get for your business
- Other credit terms, such as how much credit limit a vendor or supplier will give you
- How high your business’s insurance premiums are
- Whether or not an investor is likely to invest in your business
How can I improve my business’s credit rating?
As a small business owner, you have a lot on your plate. Your business’s day-to-day operations keep you on your toes and in the here and now. But owning a business means that you always have to be looking ahead for the long term.
This means staying one step ahead when it comes to your business’s credit rating. Let’s say you’ve spent a good bit of time focusing on building your business credit, but your rating isn’t as good as you hoped.
At times, despite your best efforts, you can be turned down for a business loan. You wouldn’t be alone either. Thirty-six percent of business borrowers have been turned down for business financing due to bad credit scores or a lack of credit history.
It’s a good idea to be proactive and improve your business’s credit rating before applying for financing. Here are some things you can do to fix your credit score.
Find out what your business credit score is.
Nearly three-quarters of all small business owners don’t even know what their credit score is. The first step towards improving your credit score is finding out where you stand. You can get your credit scores from each business credit reporting agency. If you’re refused a business loan because of your credit report, you’re entitled to a free copy of the report within 90 days of the denial.
Scrutinize your credit reports carefully.
Once you have your reports, look for inaccuracies and dispute any incorrect information. This might include a debt that is listed as unpaid when you have paid it. Once you report a dispute, the lender or creditor has 30 days to answer the dispute. If they fail to do so, the agency must remove the disputed info from your credit file.
Avoid canceling unused accounts.
If there are older accounts on your credit report that you don’t use, you’ll probably consider canceling them. But, it’s a better idea to leave them open because account closures will lower your business credit score. So just keep them open.
Look for unreported paybacks.
You might notice that some of your vendors have neglected to report your credit history with them to the bureaus. If this is the case, reach out to them if you have a good payment history, and ask them to report your timely payments, even if it’s only to Dun & Bradstreet. They’re the most important when considering strengthening your business credit profile. In the future, avoid having accounts with suppliers and vendors who won’t report your payments.
Examine your credit utilization ratio.
This ratio is crucial when an agency assigns your credit profile a score. It is a measurement of how much credit you have used in relation to the amount of credit limit you have left. You want to keep the ratio under 30%. Anything higher signals a potential creditor that your business might be over its head in debt. You can lower your ratio by paying down your credit balances or asking your lender to increase your credit limit.
Pay bills on time.
It’s not uncommon for a business to fall slightly behind on bills. Implement a sound bookkeeping system for your business and have a high priority for paying bills on time. Any late payment negatively impacts your credit score.
Consider opening a new account.
This is especially important if you lack credit under your business’s name. A combination of accounts on your credit report, such as a business credit card and a business loan, works best.
The bottom line on improving your business credit score for fast funding
Building and improving your business credit score takes time. But doing so is vital for your business to reach its full success. A good credit score will enable you to secure fast funding for your business through lower-interest loans and better repayment terms from your creditors.
Are you having cash flow deficits while building your business? Even if you’ve experienced bankruptcy, as Biz2Credit client Pradeep Saini has, you may still be able to get funding. Contact the small business lending experts at biz2credit for business financing.