May 18, 2022 | 5-minute read (1017 words)
Banks, lenders, creditors and vendors frequently use a business's credit score to measure its financial stability and project its future financial performance. A strong credit score makes it easier for businesses to qualify for bank loans or to secure other sources of financing at a competitive interest rate.
On the other hand, businesses with a poor credit score often struggle to obtain financing, and they usually experience less favorable repayment terms. Indeed, a study by the Federal Reserve Banks of Atlanta, New York, Cleveland and Philadelphia finds that 36% of small-business borrowers are rejected for a loan by creditors due to their credit score, and around 30% are denied due to an insufficient credit history.
In short, the better a business’s credit score is, the more the terms it is likely to get a loan. This may include a lower interest rate, a larger credit line and a longer repayment period. A good credit score may also enable businesses to negotiate lower insurance premiums and more favorable payment terms with suppliers and vendors.
Follow these 3 steps to establish a business credit score in your company’s name:
• Choose a business structure, such as an LLC, partnership or corporation, to establish a business credit profile.
• Register your business and obtain an employer identification number. The EIN is used by the government, business credit bureaus and other institutions to identify companies.
• Open a business bank account that puts the business’s bills and invoices in the firm’s name.
Personal versus business credit score
Lenders use both personal credit and business credit scores to measure the level of risk a borrower poses, but in different scenarios. A personal credit score informs lenders about how well a person manages their credit obligations assigned under their social security number. A business credit score tells lenders how likely the business is to repay its debts.
A personal credit score is a three-digit number, typically between 300 and 850, with a score above 700 generally considered excellent. Meanwhile, a business credit score typically ranges from 0 to 100, with 80 or higher considered good. Most lenders prefer to check business credit scores when reviewing a business loan application — but some lenders may also evaluate the borrower’s personal credit scores if the business is deemed to have an insufficient credit history.
6 strategies to boost your business’s credit score
Business credit bureaus such as Dun & Bradstreet, Equifax and Experian collect businesses’ payment data to come up with their credit scores. But each credit bureau uses a different method to calculate the credit score.
A lender or vendor could check for your credit score from any of the credit bureaus. Here are six effective strategies that every business can use to boost their credit score, regardless of which bureau is used to derive your score.
1. Pay your bills on time
To build a good credit score, always pay your bills in a timely manner. In some cases, the sooner you pay, the better your score will be. Also, most credit bureaus consider a company’s payment history when evaluating its credit score. Following these steps can help you stay on top of your invoices and bill payments:
• Record all account payables at a single location to track due dates and set reminders to pay.
• Automate your online payments for recurring bills, like utilities or credit cards.
2. Keep your credit profile error-free
A company’s credit profile informs lenders and vendors about its creditworthiness. It shows how well you have managed your business’s credit obligations and how reliable you are with making debt repayments. Check your credit report from time to time to make sure there are no errors. If you find any mistakes, reach out to the concerned credit bureau to file a dispute.
3. Establish trade lines with suppliers
Many suppliers and service providers allow you to pay several days or weeks ahead of receiving the inventory — such as paying within 30 or 60 days after receiving your goods or services. These third-party vendors could help you build your business credit by reporting your payments to a business credit bureau. You can also set up trade lines with small vendors or suppliers, like water or electricity distributors, who report your payment history to one or more of the business credit bureaus.
A company’s business credit score will increase if it adheres to the terms of the trade agreement. If your vendor or supplier doesn’t report to a credit bureau, you can document payments as a trade reference on your credit bureau account, and the bureau will use it to gather your payment information for calculating your credit score. Positive trade references can help businesses to improve their credit score.
4. Borrow from lenders that report to credit bureaus
To help build your business’s credit score, open accounts with creditors that will report your company’s payment history to business credit bureaus. Such lenders and creditors can boost your business’s credit score.
5. Get a business credit card
Using a business credit card can help companies build and improve their credit score, as long as they stay on top of spending and monthly payments. Apply for a business credit card from a financial institution that reports your account activity to one of the major business credit bureaus.
Try to use your business credit card specifically for business expenses, like office supplies or fuel for the company vehicle. This helps you track and manage your monthly business expenses while keeping them separate from your personal finances.
6. Maintain a clean credit history
A company’s credit report contains all public records filed in its name, including bankruptcies, judgments and liens. A court ruling (judgment) against a company in a debt collection lawsuit and a creditor seizing your property for not paying a loan or unpaid taxes will negatively affect your credit score. A company’s credit report also includes the age, size and type of the business and the amount of credit used as compared to the amount of credit available (credit utilization ratio).