How to Build a Better Business Credit Score
What’s the difference between a business credit score and personal credit score?
Don’t get confused by a business credit score and a personal credit score. The two scores are independent of each other since they measure different things. A business credit score measures the ability of a business to meet its own financial obligations.
Some people call it a commercial or trade credit score. Financial institutions use it to determine whether a company qualifies for a business loan. A high business credit score means the firm is highly-likely to secure a loan. A low score can lead to high interest rates or even being outrightly denied the loan.
A personal credit score is what the bank uses to assess whether you qualify for a personal loan. It determines the terms at which you will secure the loan if you do at all. People with higher personal credit scores are highly-likely to obtain loans on favorable terms.
When Does a Business Owner Need To Use Their Credit Score?
As a business owner, you will need to use your credit score in a number of instances. They include the following:
- Obtaining cheap credit (loans) in terms of reduced interest rates.
- Obtaining business credit without requiring a personal guarantee.
How Exactly Do You Build Your Business Credit Score?
A number of business owners have suffered the embarrassment of being turned away by banks because of poor credit scores. If they succeed to get credit, they end up paying higher interest rates. To make matters worse, they also suffer less favorable terms with suppliers and higher insurance premiums. So how do you build your business credit score? Try the following:
- Keeping your information current. A number of credit bureaus collect data which they use to create business credit scores. Take Experian, Equifax, and Dun & Bradstreet into account. Since the bureaus use a different formula to calculate credit scores, it is prudent that you work with all of them.
- Establishing trade lines with suppliers. That will depend on how close you are to your suppliers. If your relationship is the type in which you have an accounts-payable, ask the supplier to report your dealings to a business credit bureau. Sticking to the terms of the trade agreement will result in a higher business credit score.
- Timely credit payments. All credit bureaus will use your history of paying creditors to determine your business credit score. Timely payments attract good scores while late ones lead to very poor ones. As you do that, make sure you are using your credit lines without exhausting them.
- Keeping clean public records. How do you clean up your business records? Well, free yourself of liens, unfavorable court judgments, and bankruptcies. These have a negative effect on your business credit scores.
- Borrowing from lenders who report to credit bureaus. That will help if you make your payments on time and your lenders report it to the bureaus. In fact, most lenders, big and small, do report to credit bureaus.
If you need to take out a loan to get your business off the ground, don’t underestimate the power of your business credit score. Instead of being intimidated by it, start establishing and building your credit score so you can have the funds you need for start-up costs, growth and expansion.