Although most small business owners understand how their personal credit works, many have a limited grasp on business credit. Having a strong business credit profile hinges on having a strong personal credit score. According to a study by the Federal Reserve, on the Availability of Credit to Small Businesses, 45 percent of all business owners are turned down for a loan, due to their personal credit.
Understanding Business Credit
Repairing a low business credit score means understanding how it works in the first place. When a lender issues credit to a small business owner, much like personal credit, it is reported to business credit bureaus, such as Dun & Bradstreet (D&B), and Experian Business. Also known as trade credit, business credit actually accounts for a larger percentage of all credit transactions in the country.
With good business credit, small business owners are eligible for low-interest rate bank and SBA loans. With great business credit, your personal credit may never come into question, but it is certainly a factor if you have a low business score. The following are a few ways in which a small business owner can repair their business credit, and get on the right track to success:
Analyze Your Current Reports
Unlike personal credit, accessing your business credit report is a little more difficult. You are not entitled to a free report each year, and D&B and Experience both charge a fee. You can, however, request a copy of your report within 90 days if a lender has turned you down.
If there are any mistakes on your report, you should attend to them immediately. If the lender refuses to correct the error, you can file a dispute with the credit bureau. The lender will then have 30 days to verify the information, or it will be removed.
Keep Your Debt Level Low
When you have a high level of debt, it suggests your business has less breathing room. Borrowing too much can hurt your business credit score, as it suggests you may be struggling financially. Experian advises that business owners keep their debt level at 20-30 percent of your actual credit limit.
Pay on Time
Although this may seem obvious, paying off your bills is the best way to fix your business credit rating, and ultimately the way to secure a good loan. Decreasing the amount owed on your business credit cards can have an immediate impact on your score.
Having a consistent pattern of timely payment will increase your score over time. Once good credit is established, you can request a credit line increase, which lowers the percentage of your available credit in use.
Open Accounts and Don’t Close Any
Every small business owner should have at least one to two credit accounts. Although “no credit” doesn’t necessarily mean bad credit, there is nothing for lenders to use in evaluating your credit history, and you will most likely be turned down for the loan. Once you have opened these lines of credit, arrange automatic payments on them, to budget accordingly. It is important not to open any more accounts than you may need, as every application accounts for five points on your score.
Closing accounts will not help repair your business credit score—in fact, it may do damage. If you have a credit card you have not used in a while, make a small purchase and pay it off immediately. Keeping an account open increases your overall debt availability, which raises your business credit.
Ask Vendors to Report You
Because vendors are not required to report trade credit transactions, many do not. If you have a positive relationship with your vendor, ask them to give Experian or D&B a call. The more vendors that report a positive credit history with you, the higher your rating will be.
Understand that fixing your business credit score may take some time. Set a goal and have a number in mind of where you want your credit score to be. As you pay down your debt, continue to monitor your reports. Understanding how business credit works, will help you make positive changes for the future of your business.