A business’ credit score is more than just a static number on a report. Like with personal finances, there are credit reporting services that provide a credit report and credit score for businesses. A good score can translate into better payment terms with top vendors. A good business credit score can mean the difference between getting a much-needed loan or failing to qualify. A good credit score is the language the industry uses to describe a business as creditworthy.
Here are 15 tips to improve your business credit score
What’s a credit score and why does it matter?
Credit scores are used by banks, lenders, and vendors to determine how creditworthy your business is. Business credit scores answer the question: how likely is this business to pay me back on time? There are various credit reporting agencies with different ways to create a business score but they’re all pretty much focused on providing some financial transparency. The good news is that if you understand what goes into a credit score, you can work to improve and build your own business’ credit score.
Separate your personal finances from your business finances
This is the first thing you want to do as you begin the process of hacking your business credit. Most businesses, as they’re just getting started, rely on the personal credit of their founders or owners. They have to — a young business hasn’t had enough time to establish credit history. Disentangling your personal credit file from your business’ will begin to establish credit for a business on its own merits.
Get a copy of your credit report
Unfortunately, there’s no equivalent of AnnualCreditReport.com for businesses. U.S. Federal law requires credit bureaus to provide an individual’s credit report to her for free every year. There’s no such thing for businesses, though there are ways to get your business’ credit score for free.
Even if you have to shell out a few bucks, it’s worth pulling your own business’ credit report as you begin the process of building and improving the credit score for your business. If you can’t measure something, you can’t manage it. So pull a report to start. You’ll then want to monitor your business credit score relatively frequently.
It’s estimated that about 80% of credit reports include some type of error. It doesn’t have to be malicious but with small businesses, it’s common that other business’ information creeps on to your file. The credit reporting services, like Dun and Bradstreet, Experian, and Equifax all have processes to dispute and correct information that appears on your business credit report.
Pay bills on time
Credit scores are made up of a lot of factors. The most important factor impacting your business credit score is when you pay your bills. Your payment history determines 35% of your business credit score and is one of the ingredients of your credit mostly in your control. Things happen as you try to grow a business and it isn’t always easy to pay bills on time. Do your best to pay them.
If you have the cash, you may even want to pay certain bills early. For example, Dun and Bradstreet’s PAYDEX score is a common score lenders use to just the likelihood your business will pay back a loan on time. To calculate this score (1-100), D&B looks solely at 12 months of rolling payment history. A good score — meaning if you always paid on time — gets an 80. To score higher than an 80, you’d have to actually pay bills earlier than is requested by a vendor or creditor.
When you read about building business credit, you’ll see this word — tradelines — bandied about a bit. It sounds fancy but it really just means an account with a vendor. Vendors will frequently require upfront payment when dealing with a new customer. As the these two parters get to know one another, the vendor may extend Net30 payment terms, which means the vendor will ship goods without receiving an upfront payment. The customer is expected to pay within 30 days of receiving the goods.
Business credit scores, like D&B’s PAYDEX, require at least 3 tradelines to establish a score. When starting out, it can be a good idea to establish tradelines with vendors who provide goods and services on a regular basis, like your phone company, an office supply company, and your electric company.
Make sure vendors report
Not all vendors report your payment history to the credit reporting services. They’re not required to do so — they do it voluntarily. Most big suppliers do this as a matter of practice while others aren’t in the habit of consistently reporting. Ask them upfront, before you start working with them, whether they report tradelines and to which services they do report. If you’re already working with a vendor, you can see on your credit report whether or not they’re reporting and the frequency at which they’re doing it.
If your current vendor isn’t reporting or has a spotted history of doing it, nudge them gently with a reminder. If that doesn’t work, it may be time to move your business elsewhere to a vendor who does report regularly.
Keep credit card balances low
After your payment history, the next largest factor in your business credit score is the amount of money your business owes. Credit utilization is how much of the credit available to your business you actually use. If you have a credit card with a $10,000 limit and you generally only spend $2,000 a month on it, your credit utilization is 20 percent.
Credit scoring firms like to see credit utilization around 30 percent. It shows you’re borrowing responsibly and that your debt isn’t snowballing. If you have a particular month where your business’ expenses were extraordinary, consider making multiple payments during a billing cycle to keep your utilization rate low.
Expand your credit card’s credit limit
Credit utilization is a big thing as it accounts for a big percentage of your business credit score. Credit scoring services like utilization to be around 30%. One way to keep that number low is by not spending that much. Another way to keep the utilization score low is by expanding the total amount of credit you have available to you on a particular card.
Some credit cards have a policy of periodically reviewing good credit standing and will proactively reach out to offer a higher limit. With other cards, you’ll need to reach out to them and request a higher credit limit.
While 8 in 10 Americans get approved for a higher limit, less than 30 percent of cardholders surveyed asked for one, according to a recent poll. So, give them a call when you’re ready.
Piggyback a business credit partner
As your business is building its credit (or repairing poor credit), consider tapping someone with good credit history to help out your business. This is especially important if you don’t have sufficiently good enough credit to qualify for unsecured loans (like credit cards) for your business. The idea is that you can use a partner’s good credit to help your business qualify for an unsecured loan.
You’re not going to find someone on the street like this, so your partner should be close to you or your business. A close friend, family member, board member, or investor in your business can all act as a business credit partner. The business credit partner is essentially leveraging her good credit to help your business obtain the credit it needs.
Years ago, there was a lot of monkey business where people were piggybacking all kinds of people willing to lend out their credit scores, even if they had no skin in the business. Many of the credit reporting services cracked down on this practice and do investigate the relationship of the business credit partner.
Consolidate some invoices
Boosting a business credit score is about crafting a story about a business that it’s a good business partner. That means, demonstrating good payment behavior with multiple vendors
D&B’s PAYDEX score, a common rating that looks at a business’ 12 months of payment history, requires at least three vendors to report on a business. The interesting thing about PAYDEX is that the score is also dollar-weighted. That means they payment (or lack thereof) of a bigger bill figures more prominently in a business’ credit score. By consolidating multiple invoices to a single vendor will enable a business to built more credit faster with a larger payment.
So, while it’s important to expand the number of vendors you work with, consider consolidating some related items (like telephone, internet, and cable or office paper and supplies) to a single vendor.
Pay off strategy when things are tight
D&B’s dollar-weighting of its PAYDEX score will also influence which bills your decide to pay off first when things get tight. If a larger bill carries more weight in PAYDEX, then it follows that in times of distress, you’ll want to pay off larger bills first when your cashflow falls short and you can’t pay all your outstanding bills. Focus first on paying the larger bills before working down to some of the smaller ones.
Communicate with creditors
In a world of email, SMS, and chat, we sometimes avoid the telephone. When you’re avoiding an aggressive telemarketer, that’s a good thing but when working with creditors, a good old, person-to-person conversation can go a long way.
This is true, especially if times are tight. When a creditor needs to report a negative credit event to a credit reporting agency, they do have some discretion in how bad they make the black mark appear.
“So depending on your financial and credit situation, if you take a proactive role in working with your creditors/lenders to pay off your debts, you can sometimes get them to work with you financially, plus get them to show mercy when recording information with the credit reporting agencies that won’t have such a negative impact on your credit score,” wrote Jason Rich in The Complete Book of Dirty Little Secrets: Money-Saving Strategies the Credit Bureaus Won’t Tell You.
Don’t close old credit cards
As we pay off debt or consolidate our spending on fewer credit cards, we have a tendency to want to close old credit cards. You’re not using them — they’re a liability. So why keep them open?
You’re going to want to keep open on business credit cards because even though you’re not using them, they do impact your credit history. The longer you’re in good standing with a credit card company, the more positively this is looked at by the credit scoring firms like D&B and Equifax. It’s a funny system where lenders view businesses with shorter credit history as riskier than those firms with longer credit histories. Keeping your oldest credit card open will help to preserve this timeline of your business credit.
Keep the number of new credit cards low
Credit scoring agencies like D&B or Experian try to find patterns or trends in your business’ credit to tell users of your score (lenders or vendors) something about your creditworthiness. Lenders don’t like to see a flurry of applications for new credit cards and loans. That spooks them. It looks desperate. It looks like there’s some financial distress going on.
When you apply for a credit card, the credit card company will pull your business’ credit file. When it’s done like this, it’s considered a hard pull, negatively impacting your credit score. For contrast, when someone does a background check on your business and uses your credit report, it’s considered an inquiry or a soft pull and doesn’t affect the credit score of your business.
Limit the number of hard pulls on your credit over a short period of time.
Keep your business profile up to date
Credit scoring services and lenders like that you’re well organized as a business. That goes for paying bills on time but also for seemingly minor things, like keeping your business profile up to date. They like to see addresses, phone numbers, and other business profile information regularly updated with any changes. So, make sure your profiles with the credit scoring firms like D&B, Experian, and Equifax have your business’ most current details.