Your business's credit score plays a significant role in the financial stability and success of your company. It helps determine whether or not your business will be approved for loans, and it also affects the interest rate and terms of those loans, much like your personal credit score. Your business credit score can even influence your ability to obtain commercial leases, establish relationships with suppliers, and navigate other business relationships.
To run your business as effectively as possible, a good credit score is helpful. Here are some tips to help build and maintain your credit score as a business owner:
1. Check your credit report regularly
If you want to improve your business's credit score, you need to understand your current financial position. Pull a copy of your business's credit report and review your score as well as the other information on the report. Then, commit to checking your score on a regular basis to track your improvement or identify opportunities to increase it.
2. Make a dedicated effort to improve your score
Your business credit score will improve over time if your business uses credit wisely, but there are also several steps you can take to proactively improve it. One way to start is by disputing any errors that may appear on your business’s credit report and paying off any bills in collections or liens against your business.
3. Establish accounts with companies that report to credit bureaus
Your business credit report reflects your company’s history of paying back credit lines, and the more positive information on your report, the better. To build up your business’s credit history, try to establish credit lines with vendors who report to the three major business credit bureaus: Dun & Bradstreet, Experian, and Equifax.
Another way to build up your business’s credit history is to take out a credit card in your business's name, charge what you know you can afford, and pay off the balance every month. You might also consider a credit-building loan. Some banks offer low-amount business loans that can help new businesses establish credit. If your business has no credit history yet, this can be a great option to explore.
4. Pay creditors on time
Whether your business establishes credit with vendors, credit card companies, banks, or other financial institutions, you need to pay that credit back on time. Keep in mind that most creditors send a notice to the credit bureaus every month, and your business credit report reflects if you've made payments on time. If you make payments late, the report will show how late each payment was made. Any delinquencies can bring down the overall credit score for your business.
Remember - an extension of credit is not only useful for business growth and cash flow, but it can also help your business improve its ability to secure financing in the future.
5. Reduce your credit utilization rate
Your business credit score is also affected by your credit utilization rate. This is the percentage of credit you’re using compared to your total credit limit. Ideally, you want this number to be as low as possible. Some experts advise keeping this number under 30%, however, others recommend keeping it as low as 10%. For example, if you have $50,000 in available credit, a 10% credit utilization rate means that you are currently only using $5,000 of that amount. If you’re using $15,000 of a $50,000 credit limit, you have a 30% credit utilization rate.
To reduce your credit utilization rate, avoid maxing out credit cards or lines of credit and pay off your business’s outstanding balances. In some cases, it may also be beneficial to take out additional lines of credit. By increasing your available credit, you can decrease your credit utilization rate, even if you don't reduce your debt.
6. Don't make unnecessary credit inquiries.
Just like a personal credit score, credit inquiries affect your business credit score. When your business needs credit, inquiries are unavoidable, but an excessive amount of inquiries can damage your score. To safeguard your business credit score, avoid making unnecessary credit inquires.
Keep in mind, however, that there is a difference between hard and soft credit inquires. If you apply for a business loan or line of credit, the lender will make a hard inquiry. In contrast, if you check your business credit score on your own, that is a soft inquiry, and won’t affect your score.
7. Protect your personal credit score.
Although your personal and business credit reports are separate, your personal credit score can also have an impact on your business's ability to obtain financing. Many lenders look at your personal credit report when reviewing business credit applications to see if there are any red flags with your personal finances. This is especially true for sole proprietors or business owners who are personally guaranteeing business loans.
For the sake of your business, keep an eye on your personal credit report, and try to improve it if needed. Many of the same tips to improve your business credit score apply to your personal credit score as well. You should make an effort to check your personal credit report regularly, especially before applying for business financing.
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