How to Improve Your Small Business Credit Score
Unless you’re operating out of your home’s spare bedroom, there’s a good chance you will need to borrow money in order to launch and run your small business. But unfortunately, a poor credit score can have a serious impact on your ability to secure a loan.
While most of us are familiar with the concept of a personal credit score, small business owners may not realize that every company with an established Employer Identification Number (EIN) has its own business credit score as well.
If your business doesn’t yet have a strong credit rating, you may find that banks and other traditional lenders are unwilling to work with you. Furthermore, failing to monitor and maintain a healthy credit score could impede your ability to secure affordable interest rates down the line, which can increase overall debt in the long run.
Here are a few steps to help you improve your small business credit score and secure the lending your business needs to succeed.
Limit Your Credit Usage
One of the biggest factors affecting your business credit score is the amount of money owed to banks and other lenders. One common metric is the debt-to-equity ratio, which is a measure of a company's financial leverage in relation to the amount it is currently using.
Another metric is "credit utilization," which deals only with available credit in relation to debt. Because a high ratio coincides with a low credit score, small business owners should strive to keep their credit utilization below 30%.
Fortunately, you can take steps to ensure your ratio never rises too high. Instead of waiting until the end of the month to pay off your card, try to make several payments over the course of the normal 30-day billing period. Additionally, you should avoid putting too much debt on a single card. The goal is to show current and prospective lenders that you have responsible spending habits.
Pay Bills on Time
Think it’s okay to send in your Visa payment a few days late? On the contrary, paying your bills after the due date can cause your credit score to drop if the creditor chooses to report you. Furthermore, the acquired late fees can accumulate and contribute to overall debt levels. For the best results, get into the habit of paying bills on time or even a few days ahead of schedule.
Additionally, business owners looking to improve their credit scores should aim to pay down their current card balances. A common misconception is the belief that paying the entirety of your card balance will cause your credit score to drop. While you may see an initial dip in your score reports, experts say that reducing total debt affects your credit positively in the long run.
If you can’t pay off balances, consider increasing your credit limit to improve your debt-to-equity ratio and, in turn, boost your credit score as well. Just remember not to run up new balances, or your efforts will all be for naught.
Avoid Closing Accounts
If you’ve spent the last few years paying off your card balances, you may be tempted to shut down the accounts so you won’t overspend again in the future. The truth is, however, that closing too many cards can have a negative effect on your score, as it limits the amount of credit you have at your disposal.
If you find it necessary to cancel a card, opt for one with a positive payment history, as these will linger on your credit history for 10 years from the closure date. Additionally, you can ask the distributor of another card to raise the credit limit so your utilization ratio holds steady.
Check Your Score Regularly
Many new business owners don’t know what their company credit score is. Now is the time to correct that.
Periodically monitoring your credit report is the best way to avoid inaccuracies and errors that can cause your score to plummet. Fortunately, Annual Credit Report lets you review your credit reports from the three credit bureaus (i.e. Experian, TransUnion and Equifax) online for free. You can receive one report from each bureau every 12 months, and you can request them all at once or request one from each bureau (i.e. get one report at a time at four-month intervals).
Contrary to popular opinion, checking your own credit score doesn’t lower it, so you can feel free to check in whenever you choose.
Protect Your Credit Score and Your Business
As a business owner, it’s not enough to boast a high personal credit score. You must also take steps to build up your business credit and strive to keep the two areas separate.
Not only does a solid credit score help you obtain the loans you need to launch and operate, but it also helps keep your interest rates down and reduce overall debt in the long term. By following the aforementioned tips, small business owners can improve their credit scores while giving themselves a greater shot at success in the years to come.