Some small business owners don't realize that their business has a credit score. Furthermore, they don't realize that their business credit score is their financial lifeline. Not only does it help you get approved for loans and aid with expenses, it can draw in new business since it's open for public access.
I was in the same boat when I started building my company. Even if you don't know where to start, I'll help you understand what it is, why it matters, and straightforward ways to improve it.
What is a business credit score?
Investors, vendors, and lenders use your business credit score to see if you're reliable enough to do business with. The higher your score, the less of a financial risk you are.
Each of the main business credit bureaus--Dun & Bradstreet, Experian, and Equifax--use varying factors to calculate your score including payment history, public records such as bankruptcies, length of credit history, size, credit utilization ratio, and risk factors in your industry.
Why is it important?
When you're trying to grow your business or get out of a financial crisis, you'll want a loan. It'll be hard to get approved for a loan, lease, or anything that requires someone to make an investment in you without a business credit score.
Good credit scores warrant better terms. For instance, if your credit is average, you'll be required to pay back vendors on a 30-day basis. But, if you have a high credit score, they'll likely let you pay back on a 60-day basis.
Plus, it's easier for you to separate your business credit from your personal credit. If something happens to your business, protect your personal credit and let your business credit carry the burden.
How do you improve it?
When it comes to your credit score, personal or business, it's never too late to start building it. Here are five ways to improve your business credit score.
1. Establish your business
Before you do anything, make sure that your business is registered as a Limited Liability Company (LLC). It'll let credit bureaus know that your business exists so that they can start your credit report. Once that's done, get a free federal employer identification number (EIN) so you can establish your business entity.
Consider registering with Dun & Bradstreet for a D-U-N-S number. It's a nine-digit number used to identify physical locations of your business. Credit bureaus will then use either your EIN or DUNS number to calculate your credit score.
2. Check your credit report
You'll never know which credit bureau your lender is checking, so stay up-to-date with each one. I recommend requesting a credit check from a different credit bureau every few months. This way you save money and can address errors that are affecting your credit score.
3. Trade lines
If your business requires supplies or inventory from third-party vendors, then it'll significantly help your business by establishing a trade line of credit. You do business with your vendors monthly, so a good way to start improving your credit is by asking them to report to the credit bureaus. Chances are that trade credit will be the first line of credit that your business has so you want to make sure that they're reporting.
Most credit bureaus require that you have four open and active trade lines before they give you a score. While this might seem like too many to get started, you'll want them to gauge your financial reputation with multiple varying factors. The more information they have, the more accurate your score will be.
4. Pay your bills on time or early
Your payment history is a key factor to improving your credit score. It shows lenders that you're financially responsible to pay your debts. A Dun & Bradstreet Paydex score over 80 requires that you make payments on your debts before they're due.
5. Apply for business credit cards
If your business credit score is new or has very little payment history, then lenders will conduct a personal credit check.
Using credit isn't a bad thing, but you have to be wise about the way you're spending. A guide I curated for Forbes shows which cards make sense for your expenses. Your credit utilization ratio needs to show lenders that you are using your credit, but aren't maxing out your credit cards. A good ratio is around 20 percent.
If you find that you need to use more than 20 percent of your credit every month, apply for another credit card or increase the limit. It'll keep your ratio low while also letting you benefit the most from it.