If you own a business or are considering starting one, you’d best be aware of how important your business credit score is. The cliché tells us to never judge a book by its cover. However, your business will likely be judged solely by its credit score. It directly affects loan approval, lines of credit, interest rates, business relationships, possibly personal credit score, among other things. As a business owner, you should always be aware of and working to improve your business credit score.
According to June 2019’s Small Business Lending Index, a monthly report published by leading financial services company Biz2Credit, 27.6% of small business loan applications were approved over the first half of the year. That’s less than three out of every ten applications that were approved! Want to hear the real shocker? This was “yet another record high” as a loan approval percentage. Business loan approval is a competitive world. A strong business credit score can help tremendously.
Let us provide you with five tips to improve and maintain your business credit score, otherwise known as your commercial credit score. Although some or all of these might seem like common sense, there are countless other factors that go into running a business. It can be easy to fall behind on score maintenance.
The three leading business credit bureaus are Dun & Bradstreet, Equifax, and Experian. We strongly recommend getting copies of all three reports, even if it means having to shell out a few dollars. Once you get them, review them with a fine-tooth comb. Make sure all accounts are yours and reflect the current and correct statuses. Make sure also that every detail about your business is accurate. Correcting errors improve your score numerically but furthermore, not correcting them could lead to loan application disapproval.
Bear in mind also that plenty of credit monitoring services exist, which alert you when changes are made to your commercial credit report. Catching a problem early and fixing it ASAP is essential in maintaining your score. Once you’re positive that your report accurately reflects the state of your business, it’s time to try and establish some more credit, if need be.
You’ve surely heard that it takes money to make money. Well, it also takes credit to get credit. How could one prove timely repayment without ever having had a loan… or four? It’s critical to invest some (if not all) of your own money into the business, but if you’re doing so with a personal bank account and/or credit card, STOP. Start your car, drive to the bank, and open a business checking account. Use this account for all of your business-related expenses and for nothing else. Also, apply for a business credit card if feasible.
Essentially, the more lines of credit you have open in the business’ name, the better for your business credit score. However, this only rings true if the lines of credit are healthy and being paid back regularly. That’s why it only makes sense to have the next tip be the complete opposite of this one, right? A handful of credit lines is a good thing. Having a store card at every place in the mall? Read on…
For a good business credit score, it’s crucial to find a balance between having few or no lines of credit and having too many. This is mostly due to something called the credit utilization ratio. It’s the difference between what you owe totally and what your max available credit is. This ratio determines about 30% of your credit score, whether personal or business. Therefore, as wonderful as having multiple lines of credit is, never do so unless all of them can be paid in full and on time.
Ideally, you should be charging no more than 1/3 of your max. You should be spending 1/3 of what you’re worth. However you want to view it, this is the norm. Bear in mind that it’s usually on your statement date that creditors report to the credit bureaus. So, spend over a third of what you can if need be – by all means. Just try to get your debts down before those pesky due dates!
Before we reveal tips four and five, it’s imperative for you and all business owners to know what exactly goes into determining a credit score. The five main factors involved are payment history (35%), the amount owed (30%), length of credit history (15%), credit lines (10%), and credit mix (10%). The percentages in parenthesis show how much of your credit score each is responsible for. Here are brief definitions for each, before we move on:
Payment history is essentially a check to see if you have paid debts late, or not at all. A perfect payment history would consist of on-time payments made in full, whereas a bad payment history would include missed or late payments.
The amount owed is a total of how much money you owe to lenders and is usually compared to your total available credit. (Remember the credit utilization ratio.)
The length of credit history represents how long you have had credit. Usually, it begins with one’s first loan and/or credit card. Good payment history with a low amount owed and a longer credit history would help a credit score tremendously.
Credit lines represent the maximum amount of money that can be charged to a borrower’s account. More often than not, credit lines are associated with actual credit cards, as opposed to something like a loan or mortgage. However, the same idea applies: larger credit lines with less borrowed against the maximum are ideal.
Lastly, the credit mix is defined as the types of accounts that make up your credit history. Some of the more common types of accounts are credit cards, automobile loans, college loans, mortgages, and other types of personal loans. More mixed credit tends to raise credit score.
Alright. Now you have three solid tips under your belt, and you have a good grasp on what makes up a credit score itself. You’re ready for the last two tips. No. 4 is the single most obvious financial rule in the history of borrowing. No. 5 might come as a bit of a surprise but could be the decisive factor in putting your score over the edge of ‘average’ and into the world of ‘good’ or even ‘great’. Here goes.
It’s universally important. Yet nearly half of Americans pay bills late. Yours truly paid a bill late within the last week of writing this. Perhaps you yourself, dear reader, are behind on one of your lines of credit. It’s common, but it’s also devastating to credit scores… especially commercial ones.
Regarding personal credit scores, late payments generally will not be reported to credit bureaus until becoming 30 days overdue or longer. This is not the case with business credit scores. Generally, vendors will set an allotted amount of time to pay a bill before late payment is reported, usually either 15 or 30 days. However, on day 16 (or 31), the late payment will likely be reported. There tends to be much less of a buffer with business scores than with personal scores when it comes to late bill payment.
Here’s a tip within a tip: get a hold of your vendor the moment you realize payment might be late. Your honesty and your (hopefully) on-time payment history could very well buy you some time with a vendor that someone less forthright wouldn’t get.
In no true order of importance, what follows are a few ways applying for a loan can benefit your business credit score. It will diversify your credit mix. It will add to the number of credit lines you have, as well as extend the length of your credit history. It will raise your amount owed, yes, but it will provide the capital which you will use to become more efficient and therefore more profitable. Lastly, timely repayment will greatly affect the status of your payment history.
As icing on the cake, the interest rates of small business loans tend to be lower than the rates of credit cards. While it is best practice to have both, not all business owners can jump right into that boat. A small business loan might be a more logical choice than a credit card for someone without the means to (successfully) apply for both.
IMPORTANT: Only apply for a business loan if you have two things: a surefire means of paying it back quickly – preferably before the due date, and something to spend it on that will increase revenue. Otherwise, avoid a loan for now. It would be foolish to apply for a loan strictly for credit score improvement.
Pay attention to your credit reports. Establish a fair amount of credit, but don’t go overboard. Pay your bills on time or sooner, and take a loan out provided you have a sound plan for what to do with the capital. It all seems simple, but it’s a lot of work considering the many other hats business owners wear aside from “credit score maintainer.” We hope our tips help you on your way! Good luck and good credit.