How To Improve Your Business Credit Score (and Why You Need To)

December 19, 2022

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Your business credit score is used by lenders and other financial institutions to assess the creditworthiness and financial stability of your business, so improving your business credit score is one of the best things you can do for your company’s long-term health. A strong business credit score can make it easier for your small business to obtain business loans, financing, and other forms of credit, and may result in better terms and rates.

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Who calculates business credit scores?

There are three major credit bureaus responsible for calculating and reporting business credit histories and reports.

Dun & Bradstreet

Dun & Bradstreet is a leading provider of business credit reports and scores. In addition to credit information, their reports also include data on a business’s financial stability, payment history, and other factors. Unlike the other major business credit bureaus, Dun & Bradstreet focuses exclusively on businesses. They do not issue a personal credit score. Dun & Bradstreet also includes information from trade lines you might have with vendors into their credit score, so making payments to your vendors is just as important as paying your debts.

Dun & Bradstreet offers several scores: there’s a score reflecting your history of making payments on existing liabilities (known as your Paydex score), a score to predict your likelihood that you’ll go under, and even a recommendation on how much credit your business should be offered with a business credit card or line of credit.

Experian

Experian is another major provider of business credit reports and scores. In addition to credit information, their reports also include data on a business’s industry, size, and location. They also offer multiple scores, including a 1-100 credit score and a financial stability rating that predicts the risk of your company going out of business.

Equifax

Equifax is a third major provider of business credit reports and scores. In addition to credit information, their reports also include data on a business’s payment history, legal filings, and other public records. Like the other bureaus, Equifax issues multiple scores to encompass your payment history, your risk of financial failure, and a score that gives insight into credit risk, or how likely your business is to fall behind on its payments.

Each of these credit bureaus may have slightly different methods for collecting and analyzing data, so it’s possible that a business’s credit scores and reports may vary slightly depending on which bureau is used. Some lenders and card issuers might look at multiple scores before deciding whether to lend your company money.

How are business credit scores calculated?

Regardless of which credit reporting agency you’re looking at, business credit scores are typically calculated using a combination of the following factors:

  1. Payment history: This includes the timeliness of payments on bills, loans, and other debts. Late or missed payments can negatively impact a business’s credit score. Even one late payment can be a significant demerit, and Equifax states it’ll be on your report for seven years.

  2. Credit utilization: This refers to the amount of credit a business is using relative to the amount of credit that is available to it. A high credit utilization ratio can be a red flag for lenders, as it may indicate that a business is overleveraged or struggling to manage its debts.

  3. Length of credit history: A longer credit history may be seen as more favorable, as it provides a more extended track record for lenders to assess.

  4. Types of credit: This includes the different types of credit a business has used, such as loans, credit cards, and leases.

  5. Credit inquiries: This refers to the number of times a business’s credit history has been checked by lenders or other financial institutions. Multiple credit inquiries in a short period of time can be a red flag for lenders, as it may indicate that a business is struggling to obtain credit.

Business credit scores are typically calculated using a proprietary algorithm that takes into account these and other factors. The specific weighting and importance of each factor may vary depending on the credit scoring model being used.

It should be noted that certain types of businesses will have to fight an uphill battle on business credit. Since the length of credit history is a factor, startups and other new businesses are at an immediate disadvantage. On top of that, there are certain industries that are impacted by their nature. Small business owners operating in risky industries like cannabis dispensaries, alcoholic beverages, and even some restaurants should be aware of the industry’s effect.

Steps to improve business credit score

To build business credit, you’ll need to take steps to improve the indicators credit bureaus look at when issuing a score. Some of these take time, and some business owners might not reap the benefits of improvement immediately.

  • Make on-time payments : Payment history is a key factor in determining your business credit score, so it’s important to pay your bills on time. Set up automatic payments or reminders to help ensure that you don’t miss any due dates.

  • Use credit responsibly: Don’t max out your credit cards or take on more debt than you can handle. Instead, use credit in a responsible manner, such as by paying off balances in full each month and keeping your credit utilization ratio low.

  • Monitor credit reports and address errors: Regularly review your business credit reports to ensure that the information is accurate and up-to-date. If you find any errors, take steps to have them corrected as soon as possible.

  • Maintain a healthy credit utilization ratio: As mentioned, a high credit utilization ratio can be a red flag for lenders. To keep your ratio low, try to keep your balances low relative to your credit limits for your business credit cards and lines of credit, or consider increasing your credit limits if possible.

Note: What is a credit utilization ratio? A credit utilization ratio is a measure of how much of your available credit you are using. It is calculated by dividing your total outstanding credit balances by your total credit limits. For example, if you have $10,000 in credit card balances and a total credit limit of $50,000, your credit utilization ratio would be 20% ($10,000 / $50,000).

Lenders and financial institutions generally want to see credit accounts sitting at 30% or less of their total limits to be healthy. This means that you are using a relatively small portion of your available credit, which may be seen as a sign of financial responsibility. Higher credit utilization ratios may be viewed as a red flag, as they may indicate that you are overleveraged or struggling to manage your debts.

  • Seek credit from reputable sources: Applying for credit from multiple lenders in a short period of time can hurt your credit score. To avoid this, be selective about where you apply for credit and only seek it from reputable sources.

By following these steps, you can help improve your business credit score over time and make it easier for your business to access the credit and financing it needs to grow and succeed.

Benefits of a good business credit score

Easier to obtain small business loans and financing

Lenders and financial institutions are more likely to approve financing requests from businesses with high credit scores, and may also offer more favorable terms and rates.

Better terms on loans and financing

Businesses with high credit scores may be able to secure lower interest rates and more favorable repayment terms on loans and financing, which can save them money over the long term.

Can lower the cost of doing business:

Some suppliers and service providers, such as credit card companies, may offer lower fees or better on business financing to companies with high credit scores.

Can make it easier to secure leases

Landlords and property management companies may be more likely to rent an office or retail space to businesses with high credit scores, as they may view them as less risky tenants.

Often a sign of good health

Business credit scores are calculated by looking at many key indicators of financial health. If your credit score is high, that’s fantastic in and of itself. But it is also likely a reflection that your company’s finances are doing well. If you’re having no trouble with debt payments and have a fantastic utilization ratio, for example, you’re probably experiencing sufficient cash flow.

Overall, a high business credit score can help your business access the credit and financing it needs to grow and succeed, while also potentially lowering the cost of doing business and improving your reputation and credibility.

Negatives of a low business credit score

Having bad credit can have a number of negative consequences for your business:

  1. Difficulty obtaining loans and financing: Lenders and financial institutions are less likely to approve financing requests from businesses with a checkered credit profile, or they may offer less favorable terms and rates if they do approve the request.

  2. Higher cost of borrowing: Businesses with a bad credit rating may find themselves paying a premium for additional funding. Because business credit ratings are used to indicate your likelihood of paying back a loan, lenders often charge more to those with negative marks on their credit file.

  3. Difficulty obtaining credit from suppliers: Some suppliers may be unwilling to extend credit to businesses with low credit scores, or they may require a larger down payment or more stringent terms.

  4. Damage to reputation and credibility: A low credit score can damage your reputation and credibility with suppliers, partners, and other stakeholders, as it may indicate that your business is financially irresponsible or unable to manage its debts.

Overall, a low business credit score can make it more difficult for your business to access the credit and financing it needs to grow and succeed, and may also increase the cost of doing business and damage your reputation and credibility.

Another option available through the Small Business Administration is an SBA 504 loan. These are very long-term loans specifically designed for commercial real estate purchases and can be used to finance up to 90% of the cost of leasing salon space. In most cases, they are capped at $5 million.

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