Just like an individual has a credit score, a business can also have a business credit score. Owners, presidents, and CEOs want their businesses to build business credit for many reasons. Sometimes a business needs cash fast, and a good credit score will allow them to get better financing terms for a loan.
Criteria Used to Determine A Business Credit Score
When a small business is young or realizes they need better credit for their business, they’ll want to start establishing credit as soon as possible. The consumer credit reporting agency Experian lists some of the factors that determine a business credit score:
- The presence of derogatory public records on the business profile, such as collections, liens, judgments, and bankruptcies
- The status, recency, frequency, and dollar amounts of any applicable liens, judgments or bankruptcies
- An increased trend in slow payment of obligations
- An increase in the number of business credit inquiries or applications that are generated by the business or the owner
- The number of trade experiences, balances outstanding, payment habits, credit utilization and trends over time
- Years in business, line of business or Standard Industrial Classification (SIC) code, size of business and other demographic data
How Do I Build My Business Credit Score?
So how does a small business go about building their business credit? Most of the credit bureaus use the same criteria when determining your business credit score, and there are steps you can take to build that score and allow your business to borrow the amount of money it needs and qualify for the best loan rates possible.
Find out your credit score – This is the obvious first step to start improving your scores. To find your business credit score, contact some of the larger credit reporting agencies such as Equifax, Experian, Dun and Bradstreet, and FICO and expect to pay $40 and up. These reports will show what factors are anchoring your credit score so you can eliminate them, raise your business credit score, and build your business credit.
Dispute Negative Information – When you receive your credit report, don’t forget about disputing the negative information on it. This can be something you really did, or it could be an error that will negatively affect your credit score. You can dispute these. If it is an error, show proof of the error and don’t give up till it is fixed. Also, many companies who have reported you for late or non-payments only have a certain amount of time to respond to a dispute. Very often, a company won’t respond, and you can erase that black mark from your credit report.
Set Up an LLC or Corporation – Now get a credit card under that business name and start using it for all of your purchases. If you are using your own personal credit card for all of your business purchases, this will do nothing to improve your business credit score. But having your credit card under your business name will direct all credit activity to your business and build your credit history. You can also obtain a DUNS (Dun & Bradstreet) number and an employer identification number (EIN) from the IRS to help tie your business dealings to your business credit score.
Always Pay Your Bills Early or On Time – This should be one of the firmest rules you have in your business. Sure, you’ll avoid paying late fees, but you’ll also keep your credit score in good condition. You don’t want your business to be considered a debt risk.
Choose Vendors Who Regularly Report to Credit Bureaus – As long as you keep these vendors happy by paying bills on time, your stellar record will find its way to the credit reporting bureaus and elevate your credit score accordingly.
Keep Your Credit Utilization Rate Under 15% – What is a credit utilization rate? it is the current revolving credit you are using (what you owe) divided by the total amount of your available revolving credit (your credit limit). This can be accomplished by paying off your balances or as much as you can. A second way is to increase your credit limit. With a higher denominator (your available credit), this reduces your credit utilization rate. A third way is to obtain new sources of credit such as a line of credit. Again, this increases your available credit which decreases the credit utilization rate.
“Pay for Delete” – If you do have any debts that have gone to collections, you can negotiate with the company you didn’t pay by insisting they remove the negative account from your credit report once you pay off the balance. If they refuse, you don’t really have any incentive to pay back that amount since paying won’t change your score. But these companies want their money, so the incentive for them is to agree to Pay for Delete.
You want to keep your business credit score healthy at all costs. You never know when you’ll have a chance to make an immediate purchase in order to continue your business or expand it, and you’ll want your business credit score to be as high as possible so you can borrow the most money with the best rates.