Bad credit isn’t something that only affects individuals – it also has an impact on a business’ ability to obtain loans and develop relationships with key partners and investors. So, if your business suffers from bad credit, you need to do something about it as soon as possible.
What is a Business Credit Score?
A business credit score is very similar to a personal credit score, though it varies in some key areas. For example, whereas a personal FICO score ranges from 300 to 850, business credit scores range from 0 to 100. While personal credit scores usually use Fair Isaac Corp.’s algorithm to calculate scores, business credit scores don’t follow any industry standard and vary from bureau to bureau. It’s also interesting to note that you can’t get a free copy of your business credit score each year, like you can with your personal score. You have to pay to see your score each and every time.
There are three primary business credit bureaus: Equifax, Experian, and Dun & Bradstreet. There are a handful of other reporting agencies, but these are the main ones.
As NerdWallet’s Claire Davidson explains, 'Bureaus typically collect payment information from sources such as vendors, banks, data-gathering trade associations and business credit card issuers. This information is generally verified through third parties.'
A business credit score is just one factor when it comes to obtaining financing and building relationships with investors, creditors, and other key partners, but it’s an important one. It’ll cost you to check your score, but don’t let the fee hold you back.
5 Tips for Improving Business Credit
If you check your business credit score and discover that it’s less than stellar, don’t get overwhelmed. There are numerous ways to improve your score over time. Here are a few suggestions:
1. Pay Attention to Your Personal Score
As a business owner, it’s hard to have bad credit in your personal life and simultaneously have a good business credit score. First off, personal habits tend to permeate businesses. If you’re loose with how you spend and manage money in your personal life, you’ll probably have irresponsible behaviors when it comes to managing your business finances. Secondly, for smaller businesses with just a few employees, lenders tend to look at the founder’s personal score. Improve your personal score and your business score will also benefit.
2. Pay Bills on Time
The single best thing you can do is pay bills on time. Not only do late fees increase your debt levels, but they make you look irresponsible and overleveraged. By paying bills on time, you can show creditors that you know how to manage money and are committed to honoring your debts. If you tend to frequently pay bills late, make a habit of paying a few days ahead of time. This will make you look really good, especially if you encounter rough patches in the future.
3. Improve Credit Utilization Rate
One of the biggest metrics the credit bureaus use to calculate business credit scores is your company’s credit utilization rate. This is simply the percentage of available credit that you use on a monthly basis. For example, if your business has an available limit of $30,000, but you only use $10,000, your utilization rate is 33%. The lower this number is, the better your score will be.
As a rule of thumb, you should try to keep your utilization rate below 25%. If you’re having trouble doing this, you can always apply to increase your credit limit. If you’ve been responsible with your current limit and aren’t overleveraged, you shouldn’t have any issues.
4. Add Positive Trade References
The credit bureaus like to know that you have good relationships with your suppliers, vendors, and other business partners. While not all companies share payment data with credit-reporting agencies, you should inquire when you have positive trade reference. Adding these references to your company’s Dun & Bradstreet file can raise your score and make you look stronger.
5. Monitor and Fix Mistakes
Don’t accept your credit score at face value. It’s possible that your actual score should be higher than your calculated score – and you won’t know unless you check.
'While all of the business credit bureaus claim to carefully vet their information, you still may find mistakes on your company’s report,' Davidson points out. 'Generally, you can correct these errors by contacting the bureaus and providing evidence that the information is inaccurate.'
Putting it All Together
A poor business credit score can really hurt your business. However, the good news is that you don’t have to be characterized by a poor score forever. By taking some proactive steps, you can improve your score over time. What are you waiting for?