How To Establish & Improve Your Business Credit Score
By building up your business credit score, you can increase borrowing limits, qualify for lower interest rates, and help limit personal liability in business dealings.
A good business credit score is important for a multitude of reasons. For one, it’ll help you get a business loan if you need one – and you never know when you might need some help. Additionally, a higher business credit score will result in lower rates on loan interest and insurance, so you’ll pay less money every month.
Establishing business credit also allows you to separate your business and personal credit scores — helpful because many new businesses that don’t have business credit rely on their personal credit to get loans or credit cards. Finally, raising your business credit score will improve your business’s reputation and potentially win you more business; after all, your business credit score is public information that anyone can look up.
Okay, now that you know why you should improve your business credit score, let’s get on with the how. It’s actually easier than you might think!
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How To Establish Business Credit
The first step to improving your business credit score is to simply establish all of your business credit scores – that’s right, you will have multiple business credit scores, and you have to take certain actions to establish them. Personal credit scores are calculated by the same criteria and scoring system set forth by FICO, but the three business credit scoring agencies are more disparate in their calculations, and their scores all signify different things. Only once you establish credit with each agency can you work on improving these scores.
Understand The Three Big Credit Agencies
The three major business credit scoring agencies are Dun & Bradstreet, Equifax, and Experian. As you may know, Equifax and Experian also perform personal credit scoring, but your personal credit score with these agencies is different from your business credit score. According to experts we reached out to, these agencies have a long track record of providing accurate credit reports — making them a popular choice among those likely to pull your business’ credit score.
“The big three credit score agencies dominate the market in terms of collecting and analyzing consumer credit information,” said John Marsano, CEO and president at Inheritance Advanced. “Although there are many agencies out there, these three are the most trusted due to their long history of providing reliable credit-related services. Because of this, lenders and creditors are most likely to check your credit score with one of these three major credit score agencies.”
So what do these agencies offer? Let’s do a quick rundown:
- Dun & Bradstreet assigns something called a PAYDEX score. This score, which ranges from 1 to 100 (100 being perfect), primarily has to do with repayment of creditors and is of particular importance to lenders looking to make decisions about whether to grant your business a loan. To qualify for a D&B credit score, you need to register for a D-U-N-S number and have active trade lines with at least three vendors or suppliers (more on those topics in a bit). While it’s free to register for a D-U-N-S number, you will have to pay to purchase a Dun & Bradstreet business credit report to see your score.
- Equifax has three different business credit scores: one based on your business’ payment history, one that predicts how likely you are to skip payments to creditors, and another that predicts how likely your business is to fail. To request a credit report, Equifax recommends incorporating or forming an LLC, obtaining a federal Employer Identification Number, opening business bank accounts in your legal business name, and setting up a dedicated and listed phone line in your business name. You can order a business credit report for your company (or another company) by contacting Equifax.
- Experian assigns one credit score, ranging from 1 to 100 (higher is better), that designates your risk to both vendors and lenders. To establish a business credit score, Experian requires at least one trade line and/or one demographic element, such as years on file, business size, and/or Standard Industrial Classification (SIC) code. You will also need to differentiate your business (as its own entity) from your personal identity with an LLC designation, employer ID number, and accounts in your business’s name. You can order a business credit report from Experian’s website.
Register For Numbers & Titles
So let’s say the credit agencies don’t have enough information on your business to provide an accurate score or complete credit report. No worries. By registering your business for a few important designations, you’ll put your business on the map as far as credit agencies are concerned.
Here’s what you’ll need to do to get started:
- D-U-N-S Number: On the Dun & Bradstreet website, you can set up your D-U-N-S number for free. This is a nine-digit number that identifies your business’s physical location. Many business organizations use D-U-N-S as a form of business identification and to check your business’s credit report.
- Employer Identification Number: Registering for a federal employer identification number (EIN) through the IRS can help establish your business credit. In addition to identifying your business to creditors, having an EIN also allows you to stop using your personal social security number for official documents, thus separating your personal credit from your business credit. Use the online EIN Assistant Tool from the IRS to get started with your EIN registration.
- Limited Liability Company: Forming your business as a Limited Liability Company instead of a Sole Proprietorship has some important benefits, including establishing your business credit. As with registering for an EIN, restructuring your business as an LLC will help separate your personal and business credit because it differentiates your business as its own separate entity. Rules on how to start an LLC vary somewhat from state to state. Incorporating your business is another option.
Open Accounts In Your Business’s Name
Opening accounts in your business’s name will also put your business on credit agencies’ radars. All of these accounts need to be dedicated specifically to business purposes, meaning you can’t use the same account for personal business. Some important accounts to open include:
Note that in some cases — such as with a business credit card — you may need to rely on your personal credit score. If that’s the case, make sure you know how to improve your personal credit score.
Set Up Trade Lines With Vendors
Setting up business trade lines with vendors or suppliers — i.e., “accounts payable” relationships — helps demonstrate your business’s ability to make payments on time.
“Businesses looking to establish credit scores need to establish good credit with suppliers,” said Ann Martin, director of operations at CreditDonkey. “Your relationship with your suppliers will essentially prove how good your business’ credit could be.”
Even if you don’t strictly need an accounts payable arrangement for your business, you can still set one up to help boost your credit score – you could, for example, set up a trade line with your office supplies or drinking water distributor. Note that Dun & Bradstreet requires businesses to have at least three trade lines with vendors and four payments on file before they will even assign a PAYDEX score.
It’s also important to note that you need to work with vendors that report your payments to the major credit bureaus for your trade lines to positively impact your credit score.
How To Improve Your Business Credit Score
Now that you know how to establish your business credit, let’s dive into what it takes to improve your business credit score. Maintaining a healthy business credit score is crucial to maintaining a healthy business — at least according to some experts we talked to.
“If you want to run a successful business and keep it running for many years to come, you need your business credit score to be as high as possible,” said Jordan Bishop, founder and CEO of Yore Oyster. And, of course, there’s not just one way to improve a business credit score. Bishop added: “There is not a single thing that will affect a business‘ credit score, but rather a conglomerate of things that work together to either work in favor or against it.”
With that in mind, let’s take a look at a few of the ways you can improve your business credit score:
Understand The Factors That Affect Your Business Credit Score
Before you go improving your business credit score, you need to understand what factors play a role in the actual score. Common factors that affect your business credit score include:
- Length of time in business
- Age of credit history
- Credit inquiries
- Payment history
- Outstanding debts via loans, credit cards, etc.
- Industry risk
- Business size
Note that this list is not exhaustive; credit bureaus may end up using even more data points to calculate your credit score. For example, Experian claims to “examine more than 140 variables” when calculating a business’ credit score.
Fix Errors On Your Business Credit Report
Once you have your business credit report in hand, go over it with a fine-tooth comb. If you spot any errors, be sure to reach out to the bureau in question. Erasing erroneous blemishes may give your score a quick boost — and such a task won’t be too time-consuming. Plus, checking for errors may be valuable time spent because mistakes dot credit reports at an alarming rate: A 2021 Consumer Reports study found that as many as 34% of consumers have caught at least one error on their credit report.
“It’s common for errors to happen on business credit reports, hence the need for monitoring your standing regularly,” said Anton Konopliov, founder and CEO of Palma Violets Loans. “Check for outdated information since this can affect the verification of your credit. It can slow down the lending process and even get your loan request denied.”
Repay Your Debts On Time
To get a perfect business credit score, you don’t just need to repay your debts on time; you need to repay them early. This includes payments to suppliers, service providers, and any other entity to which you owe money.
“If you are not paying your invoices on time, your credit score is going to be affected,” said Alex Williams, CFO of FindThisBest. “Therefore, it is advisable to clear your payments on time to all your suppliers and lenders. It will also reflect well on your business report as it will show that your business pays on time. ”
Keep Your Debt Utilization Ratio Low
Even if you have multiple lines of credit, don’t max them out. This will help minimize your debt utilization ratio, which is the percentage of your available credit currently being used. In fact, experts say it’s best to keep the amount of credit you use to as low as 15% of the total credit you have available to you.
“Decreasing your credit utilization ratio is a key factor of a healthy business score,” said Adam Garcia, founder of The Stock Dork. “Typically, it is good to keep the ratio between credit used to allotted credit at 15%. If this ratio is constantly upheld, the credit [score] improves as it shows that there is no overstretching or overutilization of credit.”
Monitor Your Credit Profiles
Once you know what your business credit scores are, you can start to work on improving them. But that’s not the only thing you need to do; it is also advisable to monitor your scores on at least a semi-regular basis by checking your reports from time to time – at least once a year. Additionally, you will want to correct any mistakes on your business credit profile that could be negatively affecting your score. All three credit bureaus provide a process to correct inaccuracies on your report, like an inaccurate SIC code or wrongfully filed UCC lien.
Finally, here are a few more things you can do that might boost your business credit score.
- Fix your personal credit (some lenders check personal as well as business credit)
- Deal with any judgments, liens, or other black marks on your report
- Avoid behaviors that hint at risk, such as closing any business-related accounts
- Stay on the right side of the law in terms of business taxes, business licenses, insurance policies, etc.
Improving Business Credit: FAQs
Business Credit Scores: Final Thoughts
Building up a strong credit history for your business can help your business in many ways. You’ll be able to increase your borrowing limits, qualify for lower interest rates, limit your personal liability in business dealings, keep your personal credit lapses from hurting your business’s reputation, and more. While most startups rely on personal credit to get things off the ground, once your business is up and running you can establish business credit in just a few easy steps. After your business credit profiles are firmly established, you can build up your scores by simply paying your bills on time (or, ideally, early) and exercising other good credit practices.