Establishing a unique and separate credit score for your business is an important step for every company. First, you’ll want to create a business that is separate from your personal finances. This is important as it protects you and your family from being liable to your business operations. After creating a separate entity, be it an LLC, S-corp, or any other formation, you’ll need to open separate bank accounts for your business and then you can begin working on your business’s credit score.
Why is it Important to Have a Good Credit Score for Your Business?
Having a solid credit score for your business is just as important as having a high personal credit score. Your credit score is an indicator for others on the reliability of your business. It will affect your ability to receive loans and trade agreements with other businesses. Banks will check your business credit score and use it as a large factor when determining the risk involved with working with your company. Credit and loans are vastly important to business operations as they will be the main source of funds to operate your business.
How are Business Credit Scores Calculated?
Business credit scores are calculated slightly differently than personal credit scores. The same major credit reporting companies, such as Equifax and Experian, are major players, as well as Dunn & Bradstreet. Business credit scores are typically calculated on a 100 point scale of varying names and collected by the SBFE, or Small Business Financial Exchange. Scores are calculated using a variety of factors such as making payments on time and credit limits. Here are the top 5 ways to improve your business credit score.
1. Make Payments on Time
Just like a personal credit score, making payments on time is a huge factor in determining your business’s creditworthiness. Failure to make payments on time may indicate a lack of funds, or simply a failure to pay attention to payments. Often times the best way to improve your business credit score is to make payments before they are due. If you pay off your loans sooner than they are expected, credit reporting companies like D&B will rank your business higher than those who simply pay on time.
2. Positive References
Solid references from trade partners, vendors, or suppliers are all great ways to improve your credit score. While not all companies will want to share financial data with credit companies, those who do can certainly help boost your credit file with positive references. The 100-point Paydex score used by D&B requires that a business list three unique trade references.
3. Maximize Your Credit Utilization Ratio
Your credit utilization ratio is based on the amount of credit you actually use compared to the amount of credit you can possibly use. This is a solid indicator of how much your business depends on credit or loans versus how much you can afford to operate without help. When trying to improve your business credit score, a good practice is to keep your credit utilization under 30%. This will help show lenders that you are not a risk for going into debt, but also show that your business can confidently repay loans. Lenders will take notice of your ability to repay debt and most likely offer you increased lines of credit.
4. Increase Your Credit Limit
Increasing your credit limit can be a solid way to boost your credit score. Not only does an increased credit limit help lower your credit utilization ratio, it also provides you with additional funds should you ever need more cash. Most businesses can request an increase of their credit limit about 6 months after showing they’re able to repay loans on time. Many lenders will conduct periodic reviews to determine if your business should automatically receive an increase of credit. You can also contact lenders and request a limit increase personally.
5. Keep Your Profile Up to Date
Banks will refer to your business profile when looking at your records, so it is very important to keep your business profile up to date and accurate. Your profile contains all of your business data, banking transactions, and payment history. It can also contain your vendor, supplier, and other lender information. Banks will use this data when determining whether or not to extend credit to your business, so you want the information to be accurate.
Regardless of if your business is fully funded or needs money, it’s important to have a strong business credit score. A business credit score not only indicates to banks that you’re able to manage debt, but also other companies will see you’re a solid investment.
Ryan Bridges is a contributing writer and media specialist for the CreditSoup. He regularly produces content for a variety of credit and finance blogs, based around the transitional challenges which comes with managing credit and financing.