Sure, understanding the impact of a business credit score is crucial. But, what’s equally important is learning how to increase it.
Many lenders consider a business credit score of 75 as “acceptable” making it harder for new startups and entrepreneurs with little credit history to apply for loans. In fact, according to the NSBA Small Business Access to Capital Study, 20% of small business loans are denied due to business credit.
Keep reading to learn four ways to increase your business credit score.
Similarly to your personal credit score, a business credit score applies to the financial health of your company. It is determined by factors such as the number of employees, historical data of the business, credit history, amount owed, and other account information.
One of the greatest differences between a personal credit score and a business credit score is the numerical ranking range. According to Credit Karma, business credit scores are often measured on a scale from 1-to-100, whereas your personal credit is scored on a 300-to-850 scale. In both circumstances, the higher your score is, the better.
Generally speaking, having a business credit score that is in the upper 20% range is a good ranking — even if the bank is not using the typical 1-to-100 scale. For those that follow the 1-to-100 scale, 80 is considered a good score.
Is your score falling below the 75-80 range? Use the following tips to help increase your business credit score.
First things first, you’ll want to check your credit report. After all, you don’t know what you’re working with until you’ve seen the full picture of your financial standing.
For instance, your business credit report identifies what is negatively affecting your score. With this information, you can take steps in the right direction to resolve or dispute these charges.
You can download it through various reporting companies such as Experian, Equifax, and Dun & Bradstreet. Unfortunately, these reports are not free.
Plans and accessibilities range from each provider, but on average you can expect to pay anywhere from $40 to $250. Think of it as an investment to improve your business credit score so that your company can have more growth opportunities in the future.
This one seems like a no-brainer, but it is a practice that most new businesses struggle with. Especially for business owners who wear many hats (sales, marketing, payroll, business development), it is easy for unpaid bills to go unnoticed.
Paying your bills on time is one of the easiest ways to increase your business credit score. However, neglecting to do so is the fastest road to having a poor ranking. Anything you do to improve it moving forward will likely be canceled out because creditors still see you as a debt risk.
If there is anything you take away from this list, let it be the importance of managing your bills!
A credit utilization ratio is a component reporting agencies use to determine your business credit score. It describes the sum of your account balances, divided by the sum of your cards’ credit limits.
For example, let’s say you have three business credit cards, each with a $1,500 spending limit and you owe…
To calculate your credit utilization ratio, you would add $250 + $500 + $700 to equal $1,450. Then, you would divide $1,450 by $4,500 (the total of each credit limit) and multiply that number by 100. So, your credit utilization ratio is 32%.
Our experts recommend keeping your credit utilization ratio under 15% in order to raise your business credit score. To achieve this goal, it is important to pay off your balances, increase your credit limit, and pay your bills more frequently than once a month.
Opening a second or third business credit card can help increase your credit score. This tip only applies to business owners who can stay on top of their spending and monthly payments.
Let me repeat that…
Only open a new business credit card as long as you can always pay your bills on time. It will do your business credit score no good if you continue to wrack up debt and interest.
My advice is to apply for a credit card that reports to one of the three best-known commercial credit bureaus I referenced earlier: Experian, Equifax, and Dun & Bradstreet. You can also access a list of all available credit card issuers that report to credit bureaus, here.
After opening your new credit card, create a plan and schedule for how you’ll use it. For example, only use your card for costs specific to your business such as office supplies or utility bills. By doing so, small business owners can easily manage their monthly expenses and schedule regular payments to keep credit balances low.
For those new to Crowdz, we offer a competitive invoice marketplace where organizations can sell their invoices for instant working capital. In part, we also wanted to create a unique way for SMBs to build credit.
Enter Crowdz’ Smart Score to Sustainability, Risk, and Financial (SuRF) Score
It is a risk assessment tool for small business owners and entrepreneurs that takes different components into consideration to develop a propriety score.
Factors that increase an SMBs score include:
The SuRF Score is similar to a business credit score but instead is used by investors to help make educated decisions about their transactions via our invoice marketplace.
The benefit to you:
The better the SuRF score, the better the chances you have of receiving invoice financing at low rates. Therefore, you can gain access to instant working capital rather than applying for a business loan that is dependent on your business credit score.
Your small business credit score is an important metric in securing a business loan and working with suppliers. But not to fear, even if your company has a low rating, there are always strategies you can implement to increase your business credit score and graduate into better loan offerings over time.
Our financial advice doesn’t end here. At Crowdz, we are always blogging about techniques startups or entrepreneurs can use to improve cash flow and profitability. Sign up for our free-to-subscribe newsletter, here.