For those with an entrepreneurial spirit, there’s nothing more exciting than starting your own business. But even when you launch your venture and figure out a way to sell your solutions, you still need to take care of a lot of additional aspects, of which improving your business credit is one of them.
Similar to your personal credit, your business credit is a reflection of your financial management. When you apply for new credit, assets, or partnerships, your business credit plays a crucial role in decision-making for third parties. This means that if you want the support of a loan to expand your business, you need to have strong business credit.
Many countries use the credit score system to evaluate an individual or business’ financial stability and viability. The credit score is used to assess an entity’s likelihood of paying bills on time.
Building your business credit score is one way to get the most money from creditors at the best payback terms. In most cases, creditors may not give you loans if you don’t have a good credit score. For this reason, I will be showing you some popular tips to improve your business credit score and be in good standing when you need a loan for your business.
Difference Between Personal and Business Credit
Your personal/consumer credit is typically managed separately from your business credit, but you also need to be aware of how their scoring differs. Personal credit score normally ranges from 300 to 900 with values between 690 and 719 considered good, while business credit scores range from 1 to 100, with values greater than 80 considered good.
Though personal and business credit scores differ as you have seen, they can both interact when you are getting a loan. While your business credit scores are a more important factor for creditors and lenders, they sometimes look at your personal credit scores before lending you money in your business, especially when you operate a sole proprietorship.
Thus, building your business credit scores also involves improving your personal credit scores, especially if you are running a sole proprietorship business.
How Are Business Credit Scores Calculated?
You can go directly to a business credit reporting bureau/agency to get your business credit score. However, these agencies take several factors into consideration. They evaluate your past debt history and how fast you respond to bills before or after they are due.
The specific criteria for calculating business credit scores may vary depending on the credit bureau or scoring model adopted but some of the factors considered in the calculations involve:
- Timeliness of payment
- Credit usage ratio, which is how much of your available credit you are using
- Number and types of accounts: Having a mix of credit types and accounts in good standing has a more favorable score.
- Public records and legal filings
- Financial statements
- Overall debt size, etc.
It is hard to say the exact factor contributed by each of these criteria in calculating the final business credit scores but it is important to note that favorable standings will increase your credit scores. This is similar to personal or consumer credit scores.
Initial Steps in Building Your Business Credit
Before we talk about improving your business credit score, you first need to create a business score for your business. Business credit scores won’t automatically be created for your business when you start it.
The following steps will help you get your business identified by credit bureaus and allow them to give you a business credit score which you can eventually work to improve.
1. Register your business
Of course, without a business, you cannot have business credit scores but you also need to get your business registered.
After finalizing your business plans and operations, you need to register your business name, preferably in the state you live in. This registration provides you with an Employer Identification Number (EIN) which is what gets associated with your business credit.
To get started with this step, you can reach out to a business legal services platform to provide you with the requirements and how to process your application.
2. Open a business bank account
Owning a bank account in your business name will enable business credit bureaus to know your credit standings. They can track your financial activity and be able to give you a business credit score based on those activities.
There is no need to hide your business identity because you don’t want your business score to be calculated. This is because it is easier to build and improve your business credit scores than having credit score bureaus publish non-representative scores for your business.
Also, in most cases, business credit score bureaus still know how to get some relevant data to score your business. Better facilitate the process while presenting evidence to increase your chances of getting a good business score.
3. Register with Business Credit Bureaus
Getting your business registered with business credit bureaus fast-tracks the process of getting your business credit score published. Once your initial score has been calculated, you can begin to work your way to improving it using any of the tips below.
Tips to Improve Your Business Credit Scores
By following these tips, you can improve your credit score for your business. A few of these tips may also apply to improving your personal credit score but I will explain how it applies to your business credit in this section.
Thankfully, these tips are not difficult to practice. Just paying a little more attention to them can make the difference between having low credit scores and sitting at the most favorable ratings ever.
1. List your trade references
Sometimes, your vendors may offer you to get goods for your business without paying the full amount. It shows that they trust your ability to pay back in due time.
Listing your trade references is like asking your vendor to make their trust in you public. You first have to establish a good relationship with your vendor. Have a good payment history, and make sure they can trust you to pay back duely. After that, you can request a trade reference from your vendor for the purpose of improving your business credit.
After getting your trade references, list them with any credit bureaus of your choice to improve your business trade credits. This process may appear cumbersome but it can go a long way to improving how other business partners perceive you and your business.
2. Make your payments on time
Paying your bills on time has a significant effect on your business credit. Your payment history is an indicator of your credit credibility and is a great way to up the credit scores for your business.
Late payment may not always be due to your inability to pay. You may have forgotten that you have a pending bill to make. To solve this problem, you can use solutions like an appointment reminder or to-do list app to help you remember a bill(s) you need to pay.
This can singlehandedly improve your business credit scores and keep your reputation high.
3. Clear your balances
Whenever you are making payments via your credit card, ensure that you clear your balances as much as possible instead of making the minimum payment.
For example, if you have a credit card limit of $10,000 and you have used $9000, you have a 90% utilization. You can still use your credit reserve as long as you make the minimum revolving payment for that credit card. However, this high utilization can send a negative signal about financial responsibility which can affect your credit scores.
To resolve this, ensure you clear up your business credit balances as much as possible every month, preferably in full. Having no debts on your business’ credit card or regularly and promptly clearing off the debts each month, can help improve your business trade scores.
3. Freeze your credit
By aiming towards building your self-sufficiency and sustainability in your business, you can improve your business credit scores. After that, you should check how to freeze your credit and avoid any additional lending.
4. Keep debt utilization at a minimum
If you don’t want to freeze your credit card or you still have a need to use credit, you should keep your usage at a minimum. This shows that you are careful about using money, especially the one you don’t own.
Even when you have an approved credit limit from multiple business credit cards or channels, keep your credit usage to less than 30% on all of them. And don’t forget to clear your balances regularly.
5. Use and manage multiple credit cards properly
Using multiple credit cards can help improve your business credit scores if managed properly. Making credits on multiple credit cards lowers your credit utilization ratio (that is, the amount of debt to the total credit limit) for each card. If you keep debt utilization at a minimum on all the cards, it can be a favorable indicator that can improve your credit scores.
On the other hand, accruing high debts on multiple cards and hitting the limits without clearing the balances in due time will lower your business credit scores and hurt your business reputation with investors and partners.
Benefits of Improving Business Credit Scores
Having good business credit scores is the most powerful indicator of your personal and business financial responsibility. It equates to your ability and willingness to pay debts without delay, which can come with the following benefits.
- Better loan terms: When lenders see your business as less risky, they often offer you loans at lower interest rates.
- You can get bigger loans
- Improved supplier-vendor relationship
- Enhanced trust from new investors
- Lower insurance cost: Some insurance companies consider your credit score in determining how much you pay on premiums.
- Reduced business risks: Having improved business credit scores also means you have your borrowing behavior in check which can lead to reduced risks of having staked your assets as collateral for borrowing at any point.
Final words
Improving your business credit scores can make it easier for you to secure loans from investors or creditors. The above tips will help you build and improve your business credit scores and, in turn, improve your credibility among investors. Just like for personal credit, having a good business credit score is hugely related to your sense of financial responsibility –– how you behave towards borrowing and paying back debts.
