Credit scores may be complex, but they play a pivotal role when you apply for commercial financing. Understanding how your commercial credit is calculated, and what you can do to improve it, positions you to easily obtain funding when your company needs to grow.
What is a business credit score, and how do lenders use it?
Like a personal credit score, a business credit score is a summary of the financial history of an institution. The higher the score, the better a business has been at repaying debts. There are several companies which provide these scores, however, most business credit scores are calculated using similar factors, such as the type of business being run or whether on-time or early payments are routinely made.
These scores can help financial institutions, vendors, insurance companies and others evaluate the risks and rewards of working with your company. Lenders look at the credit score to help them judge if the borrower will be able to pay off the loan, with a lower soccer hinting at a stronger possibility of defaulting on the loan. A good score, on the other hand, can help your company qualify for a loan, lead to better terms with vendors, or lower business insurance premiums.
How to find your business credit score?
There are 4 main business credit bureaus who monitor and can help you find your score. Each of them has different methods of documenting a score, so understanding how they monitor and report is essential to finding a strategy to ensure good credit or fix bad credit.
Dun and Bradstreet® is a public corporation that is unique in that it allows businesses to self-report financial statements and trade references. However, in order to monitor and submit these reports, a business will need to request a free D-U-N-S® Number. This is a nine-digit number used to identify each physical location of the business.
Experian® uses over 800 data elements to give a business a percentile risk score of 1 to 100. The higher the score, the less likely a business is to go bankrupt or miss a payment by 90 days.
Equifax business credit scores use information from public records and the Small Business Financial Exchange™ (SBFE), which has records of your business’s payments to credit card issuers, banks, vendors and other creditors.
FICO® scores are based on data from business credit bureaus and your application to determine your business credit score. The major difference between FICO and other business credit reporters is that it incorporates data from the principal’s consumer credit reports, meaning your personal credit could influence your FICO business credit score. The Small Business Administration (SBA) uses it to expedite credit decisions when considering applicants for certain 7(a) loans. FICO scores can range from 0 to 300, with a higher number indicating your business is more likely to make its payments on time.
Unlike with personal credit reports, the business credit bureaus aren’t required by law to give you free access to your business credit reports, so be prepared to pay for the information if necessary.
How to improve your business credit score
There are several ways to not only discover your score but improve it if the numbers won’t guarantee approval for the loan. First, review your score before applying for a loan. Checking before applying for a loan can help you prepare for the application, while also allowing for corrections to inaccurately reported items.
Once you know your score the easiest way to improve a score is to pay bills on time. Failing to pay bills on time causes concern amongst lenders and is an immediate ding to your credit score. Neglecting to do so shows lenders a debt risk, even if other actions help to improve the score.
Decreasing your credit utilization ratio is another way to raise your score. Keeping the credit used to the credit available rate at 15% shows responsibility for resources. There are a couple of ways to achieve this, including paying off your balances, increasing your credit limit, decreasing credit card spending, opening a new line of credit, and paying bills more than once a month.
Business can also establish credit accounts with suppliers or dispute any errors and inquiries which may be causing dings to their scores. Both of these helps negate negative interactions and help foster positive reporting. Adding these positive payment experiences to your credit file helps raise the score and pads it against future problems.
Your business credit score is an essential part of how your business applies for loans, but it can also affect expenses like supply costs or insurance. Making sure you have a strong credit score is essential to maintaining a healthy business. If you are looking for a commercial loan, and need help navigating the complexities of commercial credit and bad credit, we can help. Give us a call and we can walk through your options today.