Like a personal credit score, a business credit score helps lenders and suppliers know how likely it is that you will pay your bills on time.
A good small business credit score impacts your business in several important ways. It allows you to get a small business loan at a better interest rate. You can access cheaper business insurance. Credit card companies will offer you a larger credit line. Having a good credit score can also open your business up to new opportunities, such as larger contracts.
In order to build your business credit, you must have separate personal and business finances. If you haven’t done this yet, now is a great time to do so. First, you have to establish your business as a limited liability company or corporation. Next steps include getting an EIN and opening a separate business bank account.
The statistical model that determines credit scores is complex, so there are no absolutely guaranteed ways to improve your small business credit score. However, there are a few best practices that you should be aware of. You can use these tips for a new business or an experienced one. Several of these tips can be applied to your personal credit score, as well.
Check your credit report for accuracy often
When the 2021 study asked participants to check their credit reports, more than a third found errors. These errors could be misrepresenting your actual credit situation. Not resolving them could keep you from accessing opportunities in the future. These errors could also cost you money later on.
Even if you don’t find errors, checking your credit report often is a good way to understand what potential lenders see when they look at your profile. You should always be aware of your current credit position.
Dispute any errors
If you find one or more errors on your credit report, go through the steps to resolve them quickly.
Depending on the credit bureau, the process may not be so straightforward. Typically, you have to send a letter to the credit bureau that is responsible for the error. In the letter, explain the error in detail and provide your account number, name, and address. The firm generally has about 35 days to respond to your dispute.
To make the process a bit easier, some credit-reporting firms have dispute forms for you to fill out online.
Pay bills early
Some people are surprised to know that paying their credit card bills on time is not actually the best way to improve your small business credit score. Instead, aim to pay them early, 30 days before the due date. Paying so early actually improves your credit score. Of course, it also helps you avoid missing a payment.
It’s especially important to pay your bill early after you make a large purchase. When you pay early, your credit report actually shows a lower amount of credit used. It’s almost as if you didn’t use credit for that purchase at all. So, this method keeps a large purchase from negatively impacting your credit score.
Keep credit utilization ratio low
Using all of your credit every month negatively impacts your score. Try to keep the amount of credit that you use every month low instead. Most financial advisors recommend not using more than 30% of your credit each month. So, if you have a credit limit of $5,000, you shouldn’t be charging more than $1,500 per month.
Sometimes you need to exceed this recommended utilization ratio to make a larger purchase. If you pay the card off early, as mentioned above, then using more credit shouldn’t negatively impact your score. However, if you frequently need to use more credit, then look into increasing your credit line. You can also divide your purchases among a few different credit cards to keep a low credit utilization ratio on each one.
Establish accounts with suppliers
Another way to improve your small business credit score is to open a credit line with your suppliers. This method makes sense if you always work with the same companies. You can purchase the same goods and services as you normally do but pay for them at the end of the month instead of right away. When these suppliers report credit information, your positive payments are factored into your credit score.
You should pay your suppliers with the same urgency that you pay off your credit cards. Paying early is best of all. Otherwise, always pay on time and be sure not to miss a payment.
Improving your small business’s credit score requires good organization and attention to detail. Keeping track of your finances and making payments at the right time can be difficult if you don’t have good systems in place.
ServiceWorks is an online platform that helps you manage your business’s finances, employees, customers, and more. You can create and track work orders, create quotes, send invoices, and push transactions to Quickbooks. Try ServiceWorks for free for 14 days, no credit card needed.