Your business credit score changes over time, so it’s important to stay on top of those changes — especially, if you plan to apply for financing or negotiate new terms on a contract with a supplier.
Understand the value of a business credit score
The honest truth is that most people who run small businesses aren’t on top of their business credit score. In a recent survey, TD Bank asked small business owners some questions about credit scores. Only 15% percent of small business owners knew their score — the rest were completely unaware. Put differently, 69% of SMBs don’t know about credit scores or realize that they even have one.
The same survey showed that 1 in 5 small businesses will seek a loan or a line of credit in the next 12 months. Put these two factors together — the need for cash to finance a business and a lack of understanding of business credit reporting — and there’s no wonder SMBs struggle to stay afloat.
How often should I check my business credit score?
So, we’ve established the importance of business credit scoring. Lenders and suppliers will use your business credit score to determine whether to do business with you. So, improving you business credit score is necessary to grow your business.
But what’s the right frequency for checking your credit score? How often should you check it?
Think of checking your business credit like going to the doctor. For healthy people, the once-a-year checkup totally suffices. The doctor runs some test, asks you a few questions, and sends you on your way…healthy.
But for those struggling with a nagging pain, for example, that initial exam will run a bit longer. The doctor might send you to a specialist to run some more tests, until she can get to the bottom of things.
Your credit is no different. Check it too much and you’re kind of like a financial hypochondriac, focusing on a metric that doesn’t really impact your life — or your business — too much. Check it too little and you might be ignoring a growing problem that can severely impact your ability to borrow money or to negotiate beneficial terms with a supplier.
So, how often should you check your business credit score?
Set It and Forget It Business Credit Management Plan
If your business is humming along, your suppliers are happy with you and you’re paying your bills on time, chances are you don’t need to check your business credit score all that frequently. Like a yearly checkup at your doctor or mechanic, getting your business credit report and drilling down on your scores once a year ensures you don’t go too long without checking in on things.
If you fit this description and won’t need to apply for credit in the next 12 months, go on the Set and Forget It plan.
Here’s how it works:
- Pull your business credit report and/or score
- Check for errors or wrong information (it’s not uncommon for businesses to have another business’ information on their credit report)
- Do your best to pay your bills on time (or even early — more on that below)
- Check your business credit report and/or score every 12 months (rinse/repeat)
Do It Yourself Business Credit Management Plan
If you’re rebuilding or building your business credit or if you plan to borrow money for your business in the next 12 months, the Set It and Forget It strategy is too passive. You need to be more proactive in monitoring your business credit so you can improve your scores in the near future.
For consumers, Experian recommends pulling your own credit report three to six months before applying for a loan to make sure everything is in good shape — it takes time for things to run their course. It’s no different for businesses.
The reason we’re so intent on monitoring our credit scores is because we have the potential to influence those scores. That’s the game.
Here’s what to do:
- Pull your credit score: Find a credible service that provides business credit reports. Some services will provide reports — essentially, your credit file — and scores separately while others provide both together. Regardless, get your business credit report from one of the bigger services that’s used by many suppliers.
- Positively influence your credit score: There are lots of ways to do this. For example, D&B provides three ways to influence your D&B score. The main objective while improving your credit score is to pay your bills and suppliers on time. There are some tricks to the trade, though. For example, the D&B PAYDEX score is a measure of how quickly your company pays its bills. For PAYDEX, D&B tracks a rolling 12 months of your payments to vendors and suppliers. It’s scored from 1 to 100, where a score of 80 is considered good. To get to 100, though, you’d have to pay your suppliers early. If you can afford to do that, do it if it makes sense for your cashflow. Also, PAYDEX is a dollar-weighted score, which means you get a higher score when you pay off a bigger bill than a smaller one. Consider consolidating some smaller bills from various suppliers to a single bill from a single supplier to boost your score.
- Focus on the big stuff, don’t sweat the small: Five points up or down on your score isn’t going to make or break things. Remember, you’re really looking for trends here. Is your credit score steadily improving? Are you positively influencing your credit score and how? At the end of the day, it’s about making monthly improvements.
- Sign up for monthly alerts: Consider signing up for Nav or CreditSignal, D&B’s free business credit monitoring service that alerts you to changes in your company’s D&B Credit report. Most creditors report to a credit reporting service like Duns and Bradstreet every month on their billing cycle. As new information rolls in, it should make its way to your credit report.
- Be consistent about which score you’re tracking :When you’re regularly monitoring your business score, it’s important to always make apples-to-apples comparisons. Use the same score, whether it’s a D&B Paydex score or from Experian or another source. Different scoring providers use different factors and methodologies when calculating your business credit score, so make sure you’re monitoring the same score over time.
You can choose to be more active about monitoring and improving your business credit score. It’s up to you — but the higher the score, the more likely it will be that you’ll get that line of credit you applied for. There’s no magic here. The reason we’re focused on improving our business credit scores isn’t just about bragging rights.
Our business credit score is a measure of our firm’s likeliness to pay back loans or invoices from suppliers. It means we’re a healthy business to work with.
That’s the goal.
A new rule gives a (small) leg up for small business credit
Over the next three years in the U.S., the National Consumer Assistance Plan (NCAP) is being rolled out. Credit reporting that draws from public sources, like civil judgments and tax liens, will be updated more frequently, which means credit reports should include more recent changes in an individual’s credit. FICO estimates that about 12 million people will be affected by some of these new rules.
Because many SMBs rely on the strength of the personal credit of their owners, the NCAP may also impact small businesses trying to clean up some black marks on their credit reports. Nav found that 17.5% of SMBs with a NAV account have a civil judgment or tax lien on their personal reports. Businesses and individuals have long complained that credit reports weren’t updated frequently enough to reflect resolutions to court cases or tax liens.
That’s changing now.
If like many businesses, your business finances are intermingled with your personal finances, then anything that happens to you personally will affect your business credit (and vice versa). As you improve your personal and business finances, those positive changes are likely to appear on your credit score and report more quicklu than they have in the past.