We all know how personal credit scores can help us lower an APR or make a major purchase. But what some of you may not know is how “business” credit scores can impact your business.
It’s often a given that you’ll set up a business line of credit – whether to grow your business and staff, increase your inventory, meet payroll demands, or a variety of other things. Getting that line of credit hinges on the strength of your business credit report.
In this blog, we’ll go over ways to increase your business credit score – which is completely separate from your personal credit score. But first, let’s break down what makes up your business credit score and what a good score is.
Understanding Your Business Credit Score
Your business credit score measures the health of your business. If your business is at debt risk or shows red flags, there’s simply no incentive for a bank to give you the credit you seek.
As you might imagine, components of determining your business credit score include payment history and habits, credit lines, the history and key facts related to your business, bankruptcy and tax lien filings, trade experiences, trends, and more.
With these factors in mind, it’s important to know that there are four major bureaus that determine your credit score. Each one will give you a different score based on their particular system.
Here’s more on the scoring system of each bureau and what it means, so that you can determine how strong or weak your current business score is:
- Dun & Bradstreet – Dun & Bradstreet (D&B) uses their PAYDEX Score, which runs from 1 to 100. According to Fit Small Business, a score of 0-49 dictates that payments are made 31 to 90 days or more late, which means your business is at high risk. A score of 50-79 is at medium risk, where payments are made 15 to 30 days late. Where you really want to be is 80 to 100, where you’re a low risk and payments are made on time or even 30 days early.
- Experian – Experian uses their Intelliscore, a scale of 1 to 100 with anything above 76 being a good score. One major difference between Experian and D&B is that Experian actually considers the personal credit of the business owner when assessing the score. So, whether you’re a startup small business looking for help to begin your journey, or at a point where you need credit to meet today’s demands or grow in the future, your personal credit score as the business owner is very important.
- Equifax – Equifax has two different scores in their system: a credit risk score and a failure score. The credit risk score has a range from 101 to 992, with the higher the number, the better your creditworthiness. On the other hand, your failure score shows how likely it is that your business will go bankrupt or extinct in the next 12 months. This number ranges from 1,000 to 1,610, with a higher number indicating that you’re less likely to go bankrupt.
- FICO SBSS Credit Score – The Fair Isaac Corporation’s credit score actually is determined by taking all the scoring and information from the three bureaus listed above. The FICO SBSS Credit Score ranges from 0 to 300, and you typically need a score above 155 to get approved for a business loan. Interesting to note that this score is the score most often used for loans from the SBA. You actually can’t get this score from FICO. You have to pay a fee for a company to provide the reports and score associated with your business.
How to Increase Your Business Credit Score
Now that you have some understanding of what goes into a business credit score and what the score itself means, it’s time to shift to finding out how to increase your score. After all, this will determine the level of financing your business can secure, which can make or break your business, get you out of a rough patch, or help you scale and grow over time.
Check your score. The first step should always be checking your business credit score with the bureaus. While it’s not free like your annual assessment of your personal credit score, you should know your business score, and if you need to work on improving your score.
Don’t wait until you’re desperate. If you can help it, pursue a line of credit when your business is in good standing. This presents a stronger case to the bank that you are solid and more likely to pay back the loan. It also means you’re aiming for growth and establishing a good trajectory.
Pay those bills on time. This should go without saying, but when you pay your bills on time, you’ll show a lot better score. But if you don’t, your credit score will plummet and most of the steps listed in this blog will not work out because you’re still a debt risk.
Lower your credit utilization ratio. This technical term just means to not use so much of the credit amount you’ve been afforded. Credit utilization ratio is the sum of all of your balances, divided by the sum of your cards’ limits. A good rule of thumb is for your ratio to not go under 30%. So, if you have a $10,000 limit, you don’t want to spend more than $3,000 (30%). Ways to keep this number down include paying your bills more often, paying off part or all of your balances, spending less money with your credit card, and raising your credit limit.
Add trade references. Paying your vendors and suppliers on time establishes trust and credibility, but this might not show up in the info gathered by business credit reporting agencies. However, you can ensure it shows up in your company’s credit file by manually adding trade references. When positive payment experiences are visible to bureaus, you have a better chance of getting your line of credit.
Contest errors and get rid of negative account history. Your business’ reputation is everything when it comes to your determining your business credit score and ultimately if you’re able to secure a line of credit. If there are any errors or misinformation in your credit file that’s hurting you, such as an account you paid that’s showing up as unpaid, make sure you call to contest it. Also, if you’re debt reaches the collections stage, make sure their department will remove the negative account history from your file. If not, paying them won’t help, when it comes to actually helping increase your credit score.
Ready to Strategize or Have any Questions? We’re Here to Help!
As you can see, understanding your credit score and having a good credit score goes a long way in getting that line of credit you might need or want at any stage of your business. At the same time, we know this can be very overwhelming, but don’t worry because our team at SBS Accounting & Advisors is here for you every step of the way.
So, if you’re ready to dive in and strategize on determining your business credit score and/or improving it, or simply have some questions, don’t hesitate to contact us today. You’ll never know when you might be in a bind and need a credit line, or just want to grow your business.