The personal lending market is competitive, so you’re bound to hear about the value of a high credit score. Good credit does provide privileges; a high credit score grants individuals access to preferred interest rates and finance terms that may not be available to applicants with lower scores.
In addition to credit approval, a good score also makes it easier to lease property, establish phone and utility service, and even rent a car while you’re on vacation. With so much on the line, protecting your personal credit references is second nature; can you say the same about your business credit score?
Building Business Credit is Worth Your Time and Attention
Small business operators are typically pressed for time, tending to daily operations and laying groundwork for the future. Unless an issue regularly comes across your desk, it may not receive the attention it deserves. Your business credit score may fall into this category. While you know credit references are important, day-to-day duties may prevent you from giving your business credit score due consideration.
For-profit business enterprises focus on different things than individuals do, yet consumers and commercial organizations share similar credit concerns. Both rely on good credit references for access to capital and other finance opportunities. If you’ve done reasonably well establishing and preserving strong personal credit references, you already have the finance skills required to do the same thing at work.
Allbusiness.com contributor, Meredith Wood, recently outlined a few straightforward ways you can strengthen your business credit score.
- Pay off business credit card debt – Your credit utilization ratio refers to the share of open credit in use, compared to the amount of credit available to you. The figure is important to lenders evaluating personal credit strength, because a credit file reflecting excessive accounts, charged close to their spending limits, indicates a tendency to fully leverage credit opportunities. The practice reflects poorly on personal credit strength, and may have the same effect on your business credit score. To boost your business score, pay-down credit card accounts and strive to utilize a reasonable amount of what’s available. A ratio of 25 percent is thought to appease credit bureaus assessing commercial credit conditions.
- Improve your credit mix with a new line of credit (LOC) – Small business owners lean on lines of credit for everything from operational expenses to capital investment. One way to reduce a high credit utilization ratio is paying off credit card debt; opening a new line of credit may serve a similar function. Depending upon your current credit “mix” – the types of credit you use, a new line of credit may also add diversity to your credit file, resulting in favorable credit scoring. In addition to controlling your credit card accounts, managing a line of credit shows reporting agencies you’re deft, juggling various types of financing. And a line of credit can be used as needed, without incurring charges and fees during inactive periods
- Stay in business – Building credit references takes time, so staying in business works in your favor. The longer your business exists, the more time you have to establish a solid credit history and reinforce a good score. From your first days in business, consistent good habits buoy your business credit score, until it ultimately stands on its own, reflecting a long history of positive credit outcomes. Dues are paid during the early days of your venture, before earning time-tested status with creditors. Incorporating your business, getting a federal employer identification number (EIN), and opening business bank accounts are good ways to start building credit references. Once your business finds firm ground with creditors and credit bureaus, it’s important to protect your business credit score.
- Regularly review your credit report – Credit reporting agencies assemble information about your finances, drawing data from creditors and public sources. With sensitive information in motion, errors commonly affect individual and business credit reports. The best way to protect your business from reporting errors, which can have a negative impact on your score, is to regularly review your credit report for inaccuracies. Misspellings, identity confusion, calculation errors, and outdated information are only a few of the errant entries that can falsely taint your business credit score. To correct minor errors before they grow into bigger problems, frequently examine your business credit file for mistakes. Since each credit reporting agency offers its own unique report, you should review reports from each major bureau, at least twice a year.
- Keep credit applications to a minimum – Lenders are eager to share credit opportunities with business owners, but you shouldn’t jump at every chance to borrow money. Your business credit score will suffer from excess credit applications, which often leave a mark in your file. When a lender evaluating your business credit application conducts a “hard” credit inquiry, the request is noted on your credit record, impacting your business credit score. Submitting too many applications for credit within a designated time period can chip away at otherwise positive credit references, resulting in a reduced business credit score.
- Leave old lines alone – Your business credit score is sensitive to changes; shaking things up can undermine a good score. If you’re concerned about your business credit score, you may want to think twice about closing old accounts. Old credit lines help with your utilization ratio and illustrate a long history of available credit; leaving them active can actually help your score, more than hurt it.
Protecting your personal credit score is a priority, preserving the credit references you’ve nurtured for a lifetime. Unfortunately, small business owners don’t always make time to establish and nurture similar credit references for their commercial ventures. When it’s time to put your best foot forward, use these tips to boost your business credit score.