Raising capital is one of the most challenging things for a business owner. If you have a good credit score, you can work with a bank to secure a loan or discuss favorable payment terms with your suppliers.
Learn more about the factors impacting your business’s creditworthiness in this guide. Keep reading, as we will also discuss how you can improve your credit score. Let’s get started!
What Is a Business Credit Score?
If you’re playing at a casino for Bitcoin holders, for example, you could leverage a bank’s loan to make bets instead of using your cash reserves. We don’t recommend such strategies, as some people employ them recklessly, risking financial ruin.
That said, banks may be willing to lend you some money, depending on your credit score. The same is the case with businesses.
While there are many financial institutions that offer money assistance to small and medium-sized companies, you need a good credit score to secure a loan. What is this, and how can it impact your firm?
A business credit score refers to an organization’s ability to pay its debts. If a company can fulfill its financial obligations to its suppliers and other third parties, it may have a higher creditworthiness, which helps in securing a loan.
Equifax, Experian, and Dun & Bradstreet are the three major credit rating firms that assess and calculate personal and business credit scores, which can range anywhere between zero to 100.
How a Business Credit Score Works
Business and personal credit scores work in the same way. Lenders consider this when issuing new loans or rescheduling payments. While Equifax, Experian, and Dun & Bradstreet have different scoring methods, they measure creditworthiness on a scale of zero to 100.
According to financial experts, 75 is a good business credit score, allowing the company plenty of opportunities to secure a loan or discuss better supplier terms. It lets others know that you pay your debts on time, clear your bills, and avoid legal trouble.
What Determines Your Business Credit Score?
There are three elements that are important for credit rating companies when it comes to calculating a business’s creditworthiness. These include the following:
- Credit: A credit rating firm considers a company’s relationship with its suppliers when determining its creditworthiness. The number of trades, unpaid balances, and credit utilization ratio are some of the things used to calculate a business’s credit score.
- Public record: When calculating credit scores, the responsible firm will assess a company’s public records, which may include any liens, bankruptcies, or judgments.
- Demographic information: This refers to the basic information about a firm, which may include the size, age, and location of the business. Credit rating agencies usually get these details from state filing offices, public records, and collection agencies, among many other sources.
Practical Tips to Help You Improve Your Business Credit Score
Here are eight useful tips to help you improve your business credit score:
1. Pay Your Bills on Time
Punctual payments to your creditors, utility companies, and suppliers are important in ensuring a good credit score. Stay on top of your bills to avoid a negative impact on your business’s creditworthiness.
2. Check Your Credit Score Routinely
Sometimes, credit rating agencies may have access to inaccurate information about your business, which could adversely impact your credit score.
Evaluate your creditworthiness every now and then to identify any discrepancies and take the necessary measures to rectify them.
3. Build Your Credit History
You can build a good credit history by taking out small short-term loans and paying them back according to the agreed-upon terms and conditions. This may not only improve your creditworthiness but also help you maintain a positive relationship with your financial institution, allowing you to secure bigger loans in the future.
4. Ensure a Good Working Relationship with Your Suppliers
Whether it’s your suppliers or lenders, it’s essential to work closely with them to establish a track record of trust and reliability. You can improve your business’s credit score by meeting all of your financial obligations and communicating openly with the relevant stakeholders.
The first thing to do is to settle any outstanding debts, as your supplier or lender may report incidences of late payment to the credit rating firms.
5. Avoid Multiple Loan Applications
When reaching out to a bank for financial assistance, the lender will do a hard credit check to determine your ability to pay back. You should only take one loan at a time, as too many of these checks can harm your credit score.
If you need more money, work with a financial expert to secure a small pool of private lenders for your firm.
6. Run Credit Checks on Other Businesses
While working with other businesses can help you grow your company, it comes with certain risks. For example, your customer may face financial difficulties and default on their payments, which can adversely affect you.
By running credit checks on other businesses, suppliers, and partners you work with, you can prepare yourself better and take action early on to reduce such risks.
7. Timely File Your Financial Statements
As a business owner, you may need to file your company accounts according to the state and federal laws. This allows credit bureaus to draw the necessary information to determine your creditworthiness.
If you need help filing your financial statements, you should contact an experienced advisor. Misinformation or incorrect submission can be detrimental to your credit score.
8. Maintain a Healthy Cashflow
Always have sufficient cash reserves in your business. This can improve your financial statement and let lenders know that you’re capable of paying your debts.
Final Thoughts on Improving Your Business Credit Score
Your business credit score is more than a number, as it can affect your ability to secure loans, favorable terms with your suppliers, and other types of financial assistance. Understanding how it works is only half the battle.
Fortunately, you can follow the tips in this article to improve your creditworthiness and move one step closer to achieving success!
