Your credit score is not just personal; it applies to business as well. Learn how to improve your business credit score in 10 steps.
We are all aware of how our personal credit score affects our existence. Our credit score is essential to living a good life and planning for the future. It affects not just the individual but his/her family and all those depending on him/her for a living and their future as well.
With the post-recession stage that we are in, almost everyone is in the same boat. Knowledge of credit improvement has become an indispensable tool to climb the ladder of the current economic status quo.
We’ve seen the growth of credit fixing agencies. When everyone is in dire need, after the storm, we shovel the ruins for any salvageable items that would help us get through, and rebuild for the future.
That’s how credit fixing has become an in-demand service.
Any business needs capital and needs a helping, or, rather, a lending hand in the process.
You start to apply for a loan, and, unsurprisingly, the ruling hand of credit scoring takes its course. We are reminded once again, that creditworthiness is measured.
This time, it isn’t personal. It has to do with a juridical entity; your business.
As you grow your business, you should grow your credit score. Let us go through the process of understanding your business credit score and improving it in the long run.
1. Understanding the Difference: Personal vs Business Credit Score
Your personal credit score is measured by an accepted standard or system of measurements by three (3) credit unions; Equifax, Experian, and Transunion. The scoring system is also known as a FICO score algorithm. It is based on 5 key components:
- Payment History (35%)
- Amounts Owed (30%)
- Length of Credit History (15%)
- Credit Mix (10%)
- New Credit (10%)
We won’t go into details on that because we will be focusing on your business credit score. However, having a good personal credit score is essential to having a good business credit score.
When your business comprises most of your sources of income, it is hard to demarcate between one’s personal financial transactions and his/her businesses. You know what we mean.
Your personal credit score is linked to your SSN (Social Security Number) while your business credit score is linked to an EIN (Employer Identification Number).
In order for you to build your business credit score, you must register the same in order to get an EIN through Equifax, Experian, or Dun & Bradstreet. Your personal and business credit scores are interlinked.
There is no way you will be able to focus on the latter without the former. Good personal credit is essential.
2. How Do You Acquire a Business Credit Rating?
Now that your business has an EIN through the credit agencies mentioned above, they are able to monitor your business transactions.
Not to the extent of invading your privacy, but only to that information that’s necessary for computing your creditworthiness. Equifax uses a credit score range of 101 to 992.
They focus on factors such as your demographics, payments history, the ratio of your available credit with utilized credit, age and size of your business, and other public records.
Experian has a different credit scale; they rate you from 1 to 100. Most of the means they utilize are very similar to that of Equifax’s. One method that they uniquely employ is comparing you within the same line of businesses, to all your peers within the same industry relative to the lenders who have extended credit within the same industry.
Dun & Bradstreet on the other hand, also uses a 100 point scale rating. Using data from at least 4 vendors, they focus on the 1-year payment history of your business.
3. Be Aware of the Factors That Affect the Rating
This is a very crucial part. You will notice that the first few items focus on the awareness and understanding part.
The reason for this is because there is no single case when it comes to credit rating. Yours is always unique.
You will be surprised to find out that there may be things that have been affecting your credit and by reducing them, you could make a significant difference to your score.
Now we know the basic or general criterions that bureaus make use of when calculating our business credit scores. We don’t know exactly how they apply it in their end. However, there are general principles.
First and foremost, presuming that you already checked your credit score, don’t do that again within the year or so. Checking your credit score too often will have a negative impact on it.
Next, ask yourself how you are faring when it comes to monitoring your bills and payments. Do you have an effective system of tracking all your bills, payments and their due dates?
With the number of bills that we have to pay, with all the different due dates, amounts, and account numbers, no wonder some of our receipts get lost and causes some problems.
Check for Errors
Go through the details in your credit report and see if there are any errors. The bureaus might have made an honest mistake. One major reason why credit fixing agencies are in demand is (among others) due to errors.
Not mainly errors in their end, because all they have to do is compute based on the date given to them by billing companies.
Take for example; you had some unposted payment with your telephone company which caused your account to fall past due. You called your telephone company, and they had it fixed. However, the report was already made or sent to the bureaus.
This needs fixing as well. The bureaus can’t assume and change it themselves. They need confirmation from these billing companies.
Do you have accounts that have been closed, or are about to be closed due to non-payment? Call the billing company and/or the credit collections agency it was sold to and negotiate a payment plan in order to prevent any further harm on your credit score. Collections agencies are very generous in offering payment plans.
It’s much better for them than not earning anything, and, it’s good for you too.
Do you have any rentals like the library or media rentals? Since the economic collapse in 2008, these companies have started reporting delinquent rentals to the bureaus.
Who would’ve thought that those forgotten books and CDs lying in the basement or attic is one of the reasons why your credit report is the way it is? It is best to have them squared out.
Avoid any other hard pulls from other companies. Yes, that’s right. When other companies perform a hard pull for your credit score, it also affects it in a similar way when you request your credit report from the bureaus.
If any seller calls you and says that they can have your application quicker by requesting for your credit report, you may think twice about saying yes. However, some of these pulls are inevitable for life as a prospective landlord.
Just see to it that you don’t allow too many pulls for your credit score at a time.
4. Create a Goal
Yes, GOALS. One effective way of accomplishing both a short and long term goal (just like growing your business) is making a mantra out of it. Since you have your credit reports in front of you, you now have the starting point.
Know your target goal, and convince yourself that you will focus on it, and will succeed in achieving it.
Create S.M.A.R.T goals and keep yourself and your business accountable.
5. Start Organizing
Sit down, and list all the things that need to be paid. Create a space where you and your partner/s can work with ease. A conducive coworking space is necessary for any business.
That includes all your payment plan/s for all those past unfinished services. It would also be wise for your business as well. You can sit down with a partner or two; people who are good at organizing, whom you can trust.
You need to approach this with a clear and logical mind. The goal is to be able to monitor your bill payments moving forward and to identify as well as start clearing up all those old unpaid accounts. Consider employing a bookkeeper if you don’t already have one on your team.
It is time to incorporate business costs and revenue by building up your credit. Remember, take into consideration both the large and small (like those unpaid rentals for media and books) but make a hierarchy of your priorities.
6. Dispute Any Inquiries and Errors
Remember all those hard pulls from different companies? Chances are, you did not explicitly authorize all of those.
Salespersons are trained to be very assertive which leads to becoming assuming at times. There’s no harm in disputing them. It’s a very good idea actually.
Further, after you have identified all those errors, start disputing them. Contact your credit bureau and/or, ask for legal assistance.
You’d be surprised at how much your credit score can potentially improve when these errors are being worked on. Something for you to look forward to while you’re going about your everyday business.
7. Your Credit Utilization Ratio
All those three Credit Bureaus’ way of computing your credit score is affected by one similar thing; your credit utilization ratio.
In a nutshell, this refers to the total amount of credit/s you are or have been given and how much of that did you take advantage of. Accordingly, it is best to keep that ratio at 15%.
Now, here’s the trick to fixing it. First, you can call your credit card company and request a credit line increase. Makes sense right? If you get approved for a credit line increase, you’ve just decreased the ratio.
Next, open a new line of credit. It is best to do that within the same banks that you already had an existing line of credit in order to avoid unnecessary hard pulls. If you get approved, voila, you’ve just decreased it further.
Then, what you don’t want is maintaining unused credit lines. This causes a negative impact on your credit as well. The trick is distributing your usage among your lines of credit. Decreased and distributed spending; this is the key.
8. Suppliers Credit Account
Since you are doing business, and pay your suppliers every now and then depending on agreed terms, why not open a line of credit with them as soon as possible? This way, you are able to establish a credit record.
9. Delete Credit Report in Collections
Make all those negotiation and payment efforts count. Explicitly ask and remind them to remove the credit report at the end of the payment plan. This should be part of your negotiation from the beginning.
10. Add Positive Payment Experiences to Your File
Not all businesses and companies send a report to the credit bureaus. We are aware of that. Gather all those records and have them included in the reports to your credit bureaus to make them count.
Your business credit score is crucial in applying for a business loan. As your personal credit serves as part of his/her identity, this one defines your business in numerous ways.
With the right mindset and determination, nothing is impossible. Take charge of your finances and success.
All you need is the right knowledge and information.
Read through all other useful articles on lending that we have on our website.
If you would like to apply for a business loan, contact us to talk through the options.