One financial number every entrepreneur needs to know is their business credit score.
They are sort of ominous, mysterious things that we know are important but are unclear why—kinda like kombucha. (What’s up with that weird-tasting stuff, anyway?) The truth is, a lot of what we want to do with our business depends on this little number.
A business credit score ranges from zero to 100, and the higher the number, the better. Your creditworthiness is calculated using several methods, including payment history, outstanding balances, and trade experiences.
Much like your personal credit score, this numerical evaluation of your business allows creditors and lenders, such as banks that give loans, or credit card providers, to determine whether or not they will approve you. Your business credit score will also be used when you apply for business credit cards, insurance, leases, and financing for that epic billboard you want to advertise with in the middle of town.
The higher your business credit score, the more likely you’ll be approved, and the better your interest rate will be. Having a higher credit score is beneficial because it makes borrowing money less expensive. Who wants to give more money to the banks anyway? No one. So, let’s get down to business.
Let’s try to put it into a more digestible context. Remember the days of greasy cafeteria food, late-night study sessions, and sleep-inducing professors? Yep, those were the days. But once you’re out of school, your GPA pretty much ceases to matter. Instead, you are now being measured by your business credit score. So, let’s get into how you can ace this test:
BUSINESS CREDIT SCORE 101
Want extra credit on improving your business credit score? Well, let’s get back to basics and hit the books on the factors that impact it most. There are three major business credit bureaus that you need to become familiar with: Dun & Bradstreet, Equifax, and Experian. They each have their own method of determining a business’s creditworthiness.
Each bureau collects and verifies information differently, primarily from verified third parties, such as banks, vendors, data-gathering trade associations, and credit card issuers. It’s important to keep in mind that the data can be incorrect. Bureaus carefully vet their information, but you need to be on the lookout for mistakes. Generally speaking, you can correct errors by providing evidence of incorrect information. Let’s take roll on each of these bureaus.
DUN & BRADSTREET
Measures a company’s risk with a Paydex score that ranges from 0 to 100. The number you receive is based on payment data, determining whether to extend credit to you and exactly how much.
Grab your DUN & BRADSTREET report here.
Offers three different assessments to determine your score. Your Payment Index reflects payment data from vendors and creditors, including whether or not you’ve been paying on time. Your Business Credit Risk Score shows the probability of your company becoming delinquent on payments. Finally, the Business Failure Score measures the likelihood of your business closing within 12 months. Yikes!
Grab your EQUIFAX report here.
This report features information, including payment trends, public records, and account histories. This one’s not like the others because it factors in balances from outstanding loans and payments, liens, judgments, bankruptcies, public records and collection agencies, etc.
Grab your EXPERIAN report here.
ACE YOUR BUSINESS CREDIT SCORE
Ultimately, having the highest business credit score possible is essential to the success and growth of your company. Just like your personal credit score, you must boost every area possible to make a positive impact. Here are a few easy ways that can help you make the grade:
#1 – TIME IS MONEY
The most important thing is to have all your business bills paid on time. Even just one missed or late payment can hurt your business credit score. If a bill gets handed over to a bill-collections agency, you will likely get dinged for it. If this happens, there isn’t much you can do other than make future payments on time and keep other areas of your business credit score as healthy as possible.
#2 – BALANCE THE BOOKS
If you have a balance on your business credit card, make an effort to pay it down as soon as possible. Reducing the balance will have a positive and immediate effect on your score. If you have a favorable payment history, try reaching out to your creditor and ask to increase your limit to improve your ratio of credit in use and open credit. Also, if you have several business credit cards, transfer the balances, so they are evenly distributed. By lowering your debt-to-equity-ratio, you will raise your business credit score.
#3 – DON’T PULL AN ALL-NIGHTER
You’ve heard it before, and this won’t be the last time: Don’t wait until the last minute! Cramming is never the right plan of action. So, be sure to check your credit score regularly. As they say, the more you know, the more you grow. Actually, we don’t know if anyone actually says that, but it’s pretty fitting here, right? Order credit reports from a few different agencies once or twice a year to make sure there aren’t any drastic changes or incorrect information that needs to be removed. Plus, watching your credit score increase will give you the confidence and motivation to keep up the good work.
#4 – TAKE GOOD NOTES
Actually, we’ll take notes here for you. All you need to do is take notes from the people who are evaluating your credit score. To increase your Paydex score, Dun & Bradstreet recommends repaying debts on time or ahead of schedule. They also encourage business owners to be in contact with suppliers and vendors to report on positive payment history.
Equifax notes that business owners need to stay aware of missing or late payments, having past-due accounts transferred to collection agencies or debt buyers, and applying for credit too frequently in a short amount of time.
Lastly, Experian recommends many of the same tips and tricks the other two bureaus note. In addition, Experian reminds business owners to dispute any inaccuracies on credit reports, keep unused credit cards open, and maintain low balances on credit cards or other revolving credit.
#5 – BEWARE OF COPYCATS
It’s never a good idea to let others cheat off your test because one of you is bound to get caught. This is why you need to protect your personal and business credit. In 2017, Equifax experienced a massive data breach that exposed more than 145 million people. Information such as birth dates, social security, and other personal data was stolen as an effect of the breach.
Even if this didn’t affect you, it’s a reminder to all that it’s always a good idea to protect yourself by monitoring your credit reports for activity that looks fraudulent. Be sure to look out for new accounts you didn’t open, credit inquiries that don’t match up or balances that seem off. If this happens, be sure to reach out to the specific bureau right away.
#6 – GET RATIOS DOWN TO A SCIENCE
We’ve touched on this a bit before, but credit reports look at your ratio of credit used in relation to the amount of credit you have available. This is called a Credit Utilization Ratio, and for this, the lower the number, the better.
How do you decrease it? Well, it’s all about getting back to basics. Much of what we have discussed applies to your Credit Utilization Ratio. For example, pay off your balances right away, or at least get them as low as you can. You can also ask your credit card issuer to increase your limit, which will immediately decrease the ratio. Even though it doesn’t seem like an opportune time to do so, open up another line of credit. Honestly, it’s about math. Having more credit and not using it makes you look better to creditors. Last, pay your monthly bills more than once a month; that way, they won’t continue to pile up.
#7 – HISTORY LESSON
Creditors like to see that you have a solid history of managing your credit. That’s why it’s so vital that you start building up your business credit as soon as possible. Of course, the most obvious and straightforward way to extend your average age of credit is to… wait. If you haven’t gotten started yet, now is the time to shine. Open up a line of credit under your business and let time fly by. Just remember to use your lines of credit every so often (and pay them off).
#8 – LEARN THE HARD WAY
Listen, we get that things happen in life. If you ever check your business credit score and find a number that’s well, alarming, be sure to act fast! Work with your credit card companies and reporting agencies to get anything negative showing up to be removed from your credit file.
If you see something that shouldn’t be there, call to dispute it and be ready with evidence. If you should be sent to collections for any debts you may have, work with the agency so that they will delete the negative account from your report. You have to ask for this specifically. They won’t do so on their own even if you’ve cleared up a mishap. Otherwise, paying off that debt won’t help your credit score.
We totally understand that the topic of business credit scores can be intimidating, so we gotta give you credit for sticking through with us (sorry, we had to). Managing your score isn’t far off from your personal credit, but it does take a little bit of nuance. Your personal and business finances need to be separated to make this process more seamless.
No matter how you start or continue to manage your business credit score, it’s essential to establish good habits from the very start of your credit journey. That’s why we’re at the head of the class! At Alchemy Accounting, we make money management as easy as A-B-C. There are a lot of moving parts when it comes to your credit score, but we bring it back to the basics. Need some help? Set up a confidential appointment with us today.