Your business credit score is a critical indicator of your company’s overall financial health. Figuring out how to increase your credit score might seem overwhelming, but it’s a vital investment in your business’s future financing success.
To help improve business owners’ credit education, we’re breaking down everything you need to know about business credit, including how to build credit, how to repair credit, and why a business credit score is so important.
What is business credit and why does it matter?
Strong business credit is one of the best assets you can have as a business owner. Your business credit score—which is based on your company’s history of debt, payments, and credit—is a marker of your creditworthiness. Your score essentially tells lenders, vendors, and credit card companies how reliable you are with paying bills and making debt repayments on time.
The better your business credit score, the more likely you are to get approved for business loans that have favorable terms. Think: lower interest rates, larger lines of credit, or longer repayment terms. A healthy business score can also give you more leverage when negotiating insurance premiums or discussing payment terms with suppliers and landlords.
If you don’t have a business credit score yet, take the following steps to start establishing business credit in your company’s name:
Choose a business structure that separates your personal and business finances, such as an LLC or corporation.
Apply for an employer identification number (EIN).
Open a business bank account.
Personal credit vs. business credit
A personal credit score is based on your personal credit history, including the amount of debt you have and how many credit cards you’ve opened. Personal credit scores are rated on a scale of 300 to 800, while business credit scores fall between 0 and 100. So, what is a good credit score? For personal scores, 700 or higher is considered good; for business credit, most credit bureaus consider 80 or higher to be good.
Some lenders check personal credit scores when reviewing business loan applications, but most prefer to evaluate business credit scores instead. However, if you don’t have business credit—either because your business is new or you’re operating as a sole proprietor—lenders will rely on your personal credit history to assess your creditworthiness.
How to improve your business credit score
There isn’t one foolproof method for improving your business credit score, but certain strategies can help. If you want to raise your business credit score, try these five tactics:
1. Update your information with business credit bureaus
There are three main commercial credit bureaus that collect your credit information and create your business credit scores: Dun & Bradstreet, Equifax, and Experian. Not only do all three bureaus have slightly different formulas for creating business credit scores, lenders and suppliers also report credit information to different bureaus. That’s why it’s smart to update your credit file with all three bureaus instead of just one.
Start by visiting each credit bureau’s website and reviewing their guidelines for establishing or maintaining business credit. From there, you can review your file, upload recent financial statements, or check your business credit report for errors and inaccuracies. If you spot any issues, report them to the credit bureau immediately. Keeping your credit file clean, accurate, and up to date is key to improving your score.
2. Pay your bills on time
Making timely payments to lenders, vendors, utility companies, and landlords is one of the easiest ways to increase your credit score.You may have to shuffle your cash flow to beat the due dates, but getting ahead of your payments—even by one or two days—can raise your credit score.
Here are a few tips to ensure you make payments on time:
Track your accounts payable in a spreadsheet.
Set up automatic online payments for recurring costs, like utilities bills and monthly debt repayments.
File invoices as soon as you receive them and set calendar reminders to pay your bills when they’re due.
Block off one day a week to pay bills manually.
3. Maintain a low credit utilization ratio
A credit utilization ratio is the amount of credit you’ve used compared to the amount of credit you have available. Credit reporting agencies typically value lower credit utilization ratios, since it means you’re not maxing out your available credit.
A good ratio is 30%, but an excellent ratio is around 10%. Let’s say you have a $20,000 business line of credit. To achieve a 30% credit utilization ratio, you need to use no more than $6,000 at a time before bringing your balance back to zero.
Try these strategies to lower your credit utilization ratio:
Bring your balances as close to zero as possible. When you regularly pay off your balances, your credit utilization ratio drops.
Make micropayments throughout the month. Instead of paying just once a month, try making multiple smaller payments throughout the month to ensure your balance doesn’t get too high.
Increase your credit limit. Call your credit card company or credit issuer to ask for a higher limit. When you increase your limit without increasing your balance, your credit utilization ratio decreases.
Open a new line of credit. If you open another line of credit and don’t use it, you’ll have more total available credit, which will lower your ratio.
4. Open a new business credit card
Getting a second or third business credit card can help improve your business credit score—as long as you stay on top of your spending and monthly payments.
The trick is to apply for a business credit card that reports to one of the three major commercial credit bureaus. To find out if your credit card issuer sends its information to a credit agency, scour their website FAQs or call customer service for more information. You can also see a list of major credit card issuers that report to credit bureaus here.
Once you get your new business credit card, come up with a strategy for how you’ll use it. One option is to designate your card for specific business expenses, like office supplies or fuel for your delivery trucks. That way, you can easily control your monthly spending and schedule regular payments to keep your balance low.
5. Add trade references to your credit file
Many credit bureaus use trade references to get a glimpse into your payment history with vendors and suppliers. Trade references are based on a handful of factors, like the manner of payment, the current amount you owe, and the current amount (if any) that’s past due. Positive trade references help boost your business credit score.
If you work with a handful of different vendors to buy supplies or materials for your business, ask them to report your payments to a business credit bureau. As long as you abide by the terms of your trade agreement—like paying within 30 or 60 days after receiving your goods—your trade references should be positive.
If your vendors don’t want to report to a credit bureau, you can still list them as a trade reference on your credit bureau accounts. The credit bureaus you report to will then follow up to gather your payment information.
Building better business credit
Whether your business is new or more established, it’s crucial to work on improving your business credit score. Adjusting your payment habits and maintaining healthy credit can increase your score over time, putting you in a better position to secure funding and continue growing.
Fundbox and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.