Many new business owners are unaware that they have a bad credit score, which is essentially a collection of credit scores that reflect how your company manages its finances. Your personal credit score and business credit profile may both be considered in any creditworthiness decision for most small business owners in the United States. With that in mind, it’s critical to comprehend both your personal credit score and your company’s credit history. Bad company credit may appear to be a dead end, but with a little attention and effort, you may improve your credit rating.
What Factors Affect Your Business Credit Score?
Regardless of which lender you choose, they will request your credit information from one or more of the major credit reporting agencies. These organizations don’t define good or bad credit; it is a common standard utilized by lenders; instead, they simply provide the score.
Consumers may be familiar with the names Experian, Transunion, and Equifax when it comes to credit reporting bureaus; while these firms do have business divisions (think Experian’s Intelliscore PlusSM Credit Score), there are additional companies that specialize in business creditsuch as Dun & Bradstreet® (D&B), Credit.Net, and Accruint® Business for example.
In contrast to your personal credit score, your corporate credit profile is open to the public. To put it another way, anyone who is interested in viewing your business credit profile can do so. While most personal credit ratings are based on the FICO score, business credit scores will differ depending on the reporting agencies. They may, for example, weigh the same data differently, despite the fact that they will all look at it.
Dun & Bradstreet is the only major credit reporting bureau that concentrates solely on business credit, with a particular emphasis on trade credit relationships with vendors and suppliers. The 100-point PAYDEX® score is certainly familiar to you, yet it’s just one of D&B’s scores.
Equifax is linked to the Small Business Finance Exchange (SFBE), which is made up of data collected by small business lenders in the United States. Equifax uses that information to generate a report that represents how small business owners pay their credit cards and loans, which means their credit reports will be influenced by it.
Regardless of whatever business credit reporting agency you choose, they all use the same information to evaluate your business credit; however, the different ways they evaluate the data means that score may differ, and it will not be reflected in a universal credit “score” that is uniform across agencies.
In addition to your credit history, your business credit report will include a lot of publicly available information, such as information about the sort of business, the industry you’re in, where you’re situated, and any other publicly available information. As a result, it’s critical to keep an eye on your credit profile on a frequent basis to ensure that the information posted about your company is accurate and up to current.
Factors that Can Contribute to Bad Business Credit Scores
Although your score is telling, it’s not always a full picture of why you have a bad business credit. Each credit profile is different, and though late payments and collections status do have a significant role in determining how your credit is scored, specifically a bad credit score, there are other factors that can attribute to a score that’s lower than desired.
- Bad Personal Credit: If you’re just getting started or your company is relatively young, you haven’t had much time to establish a business credit history. As a result, most new business owners who apply for a loan will have their personal credit history scrutinized. If your personal credit history and score show signs of bad or very bad credit, your business credit will, too.
- Little to No Background: As previously stated, if you are a new or prospective business owner, your company will lack a strong (or any) credit history. This will not necessarily lead you in trouble, but it will prevent you from obtaining outstanding credit scores. Making on-time or early payments is the best approach to cope with this — if your business account is plagued by late payments or an account in collections, it can be enough to put you in the bad business credit category.
- Company Information: Your business credit score is influenced by the structure, size, and industry of your company. Certain industries (such as the restaurant industry) are intrinsically risky than others, and small businesses are considered riskier than those with more than a few employees. Again, the ideal solution is to pay on time or early to demonstrate that your company is reliable.
- High Credit Usage: Your credit utilization, when combined with other credit data on your credit report, might affect where you rank on the credit score ranking system. If you’re using a lot of your credit and looking for more, and you’re also having trouble meeting payment deadlines, you can be considered a high risk to potential lenders.
How a Low Credit Score Affects Your Business
A solid personal credit score or business credit profile will not guarantee you a small business loan, but it will open doors that a low credit history would not. A bad credit score doesn’t necessarily mean you won’t be able to secure financing, but it will almost certainly imply higher interest rates, fewer favorable conditions, and more frequent payments. Although this isn’t always the case, if you have a bad personal or company credit history, you won’t be able to get the best interest rates or loan terms.
Some Tips on How to Raise Your Credit Score
Fortunately, you can either develop or improve your credit profile. Be aware that there is no quick fix—slow and steady wins the race—but you might be surprised at how much and how quickly you can improve both your personal and business credit profiles by thinking in months rather than days.
You shouldn’t trust anyone who claims to be able to fix a terrible credit history overnight. The credit bureaus have seen every trick in the book. Shifting credit accounts around, for example, is rather apparent and may actually impede your credit restoration attempts.
With that in mind, here are four steps you can take to repair your credit right now:
- Monitor your credit: For a nominal cost, all of the main bureaus provide similar services for both personal and business credit.
- Keep your business and personal credit accounts separate: It’s not uncommon for business owners to pay for corporate expenses with personal credit. This is especially true for new enterprises that have yet to develop a good credit record. Although there may be instances when it’s convenient, it’s a mistake. Running up company spending on your personal card won’t help you establish business credit, and it can even affect your personal score—even if you pay the sums off every month.
- Look for opportunities to open business credit accounts: Trade credit with your vendors and suppliers is probably the most undervalued type of business credit. While 30- or 60-day payment terms may not be appropriate for a small business loan, they will assist your company in demonstrating a positive credit history, which lenders look for before approving your loan application. Furthermore, if you’re having a bad month, your vendors are more inclined to assist you since they want to keep doing business with you. You should also think about getting a company credit card. Small business credit cards are often easier to qualify for than small business loans, and timely payments will help you establish a great business credit profile.
- Make regular payments and use the credit you require: Making each and every periodic payment on time is the single most important thing you can do to establish or improve your credit rating. Both your personal and business credit are affected. A string of missed payments will degrade your credit far faster than months of solid credit habits will.