If you have ever had a low credit score, you know how stressful it can be. You also know how hard it can be to raise your credit score. Just like with a personal credit score, maintaining and improving your business’s credit score takes time and effort. If you do not know where to start, keep reading to understand what dictates your credit score and how to best build your credit.
First off, What is a business credit score?
If you are a business owner and do not know what business credit is, do not worry, you are not alone. In fact, a staggering 45% of business owners did not even know that they have a business credit score. Among the owners that did know of their credit scores, 82% did not know how to interpret their score.
To be short, a business credit score is almost the same as a personal score. They are both numerical representations of how financially responsible an individual is. Similarly to a personal credit score, the higher your business credit score, the better.
Why is business credit important?
Business credit is important as it directly impacts how vendors and lenders work with your business. A business with a higher credit score will benefit greatly because of it. A few ways in which a high credit score helps your business is:
- Better approval odds for funding. The number one reason that businesses are rejected when applying for a loan is because of their credit score. Having a higher credit score will improve your chances for receiving business financing. Each lender will have a different set of criteria that determines if a business is eligible for funding, or not.
- More friendly loan terms. Besides helping you gain access to business loans, having a higher credit score will directly lead to better loan terms for your business. A business that has a higher credit score will likely have lower interest rates on their loans.
- Improves vendor relationships. Certain vendors may look into your business credit score before working with you. If a vendor sees that your credit score is low, they may choose to not work with you.
Having a higher business credit score allows you to remain flexible as it keeps your options open when it comes to funding and lines of credit.
How is a business credit score calculated?
To understand how to build your credit score, you first need to understand what goes into calculating the score.
There are three main reporting agencies that dictate a company’s credit score. The agencies, Dun & Bradstreet, Experian Business, and Equifax Business, all collect financial data about your business and assign it a score. Just like with your personal credit score, your business’s credit score will range from agency to agency.
The main thing that each of these agencies will be looking for is your business’s ability to pay bills on time. Each agency will comb through public data, collect information from banks, and may even interview vendors to make sure that your company has no past-due bills.
How can you build business credit?
Now that you understand what business credit is, and how it is calculated, you can start to learn how to build your credit.
The last step to take before building your credit is to check your credit score. Unlike personal credit scores, accessing your business credit reports will cost money. Each agency offers different types of credit reports that range in price. The most popular credit reports are:
- The Dun & Bradstreet Credit Evaluator Plus™ – starts at $61.99
- Equifax single credit report – $99.99
- Experian ProfilePlus Report – $49.99
Now that you have a comprehensive overview of your business’s credit history, it will be much easier to raise your score.
The first way to ensure that your business score is as high as it can be is to make sure that all of the information is correct. Incorrect information can harm your score, and it happens more than you would think. If you do find some wrong information on your account, dispute it. Each reporting agency will have a different way to dispute inaccurate records. Keeping your information up-to-date is extremely important in maintaining your credit score.
After you make sure that all of your information is accurate with each credit bureau, it is time to start building your credit.
First and foremost, you need to keep your personal and business finances separate. If you use your personal credit card on a business expense, it is not helping you build your business credit. Make sure that you have a business credit card that is used exclusively for business purchases. Just like with a personal credit card, your business credit card should be used when necessary. Experts recommend that you do not exceed 30% of your credit limit, or else it can start negatively impacting your score.
Besides getting a business card, try to work with vendors that you know offer lines of credit. If enough vendors give you credit, it will start to appear on your credit report. Do make sure that you pay your bills on time, or even early. Paying early shows that you are fiscally responsible and are dedicated to building your reputation.
How long should it take to build business credit?
Building your business credit will not happen overnight. Making a few on-time payments does not indicate that you are a financially sound business.
While there is no specific timetable, business finance experts say that it usually takes three years to truly build your business credit. There are ways to fast-track this process, but for most, three years is the norm.
If you still are lost when it comes to business credit, don’t worry! It is a complex topic that not a lot of people know about. To become more knowledgeable about business credit, continue reading about it, meet with a financial advisor, or even take a course on it. Anything you can do to increase your knowledge will be helpful when it comes to building your credit.
