As a small business owner, you are on a continuous lookout for new financing opportunities. One of the most popular business funding methods is taking out business credit.
However, financial institutions will not lend you the money you need unless you have a good business credit score. That is not surprising at all given that business loans usually include a hefty amount of money. Lenders want to make sure they will get the money back.
So, what is a business credit score? How is it calculated? Why do you need to improve it? Let’s find out!
What is a Business Credit Score?
A business credit score represents the likelihood the financial institution will approve the loan. Financial institutions, including the SBA and banks, calculate it when offering credit or extended payment terms.
A business credit score ranges from zero to 100. As a small business, you need to have a minimum business credit score above 75 to be approved for the loan. According to Experian, a high-risk business credit score ranges from 1-10 on the scale, while low-risk scores are those below 76.
Many factors impact your credit score, including:
- Annual revenues
- Business assets
- The company’s longevity
- Outstanding debts
- Business credit/loan history
- Personal loan/credit history
- Public records
- Industry risks
How You Can Improve the Business Credit Score
You can boost your business credit score in numerous ways. Here are a few tactics to start implementing right now:
Analyze your Credit Report
Obtain your company’s credit report for credit reporting companies, such as Equifax or Experian. Most importantly, these reports are free.
For example, you will find out which accounts are negatively affecting your report or identify any questionable items on the report. Once you obtain the information, you can seek professional help and valuable tips on how to improve your score.
Dispute Errors and Inquiries
Hard inquiries and unpaid accounts can compromise your report. Therefore, if you notice something on your credit file that should not be there, make sure you get it removed. Many credit reporting agencies can remove negative feedback from your financial report. You can also use proprietary cloud software to remove hard inquiries.
Reduce your Credit Utilization Ratio
As we have already mentioned above, financial institutions analyze your credit utilization ratio when determining business credit scores. Focus on keeping it under 15%.
If your credit utilization ratio is higher than that, here is how you can reduce it:
- Pay off your balances or at least reduce them.
- Improve your credit limit to decrease the credit utilization ratio.
- Minimize credit card spending.
- Pay your bills regularly.
Reduce Existing Debt
Pay your vendors, reduce outstanding balances, and pay off your credit card debt. Your historical payments can make or break your business credit score. Only by getting fulfilling your financial responsibilities can you improve your credit score.
Why should You Improve your Business Credit Score?
Having a good business credit score has the following benefits for your company:
Making It Easier to Qualify for the Loan
Having a good business credit score increases your chances of qualifying for an SMB loan. Banks and other financial companies are reluctant to lend money to companies with negative credit histories. They are worried that your business will not be able to make payments on time.
Getting Better Loan Terms
Financial companies offer better loan terms to companies with positive business credit scores. For instance, you can use your exemplary credit score to obtain lower interest rates and increase credit limits.
Safeguarding your Personal Finances
Business credit allows you to separate your personal and professional finances. Your organization’s loans and debts will appear on its credit reports. That way, they protect your personal credit rating from any financial problems your company faces. On the other hand, you can also protect business finances from personal financial issues.
However, that does not mean you should neglect the importance of your personal finances. We mentioned above that many lenders will want to assess your personal finances when reviewing your loan application.
Getting Better Terms from Suppliers
A good business credit score improves your relationships with suppliers. It a supplier believes that your business is financially stable, they will allow it to purchase equipment, inventory, and office supplies on credit.
Over to You
There are many benefits of improving your business credit score. It will help you qualify for credit and get better loan terms. Most importantly, you will build trust with suppliers. Precisely because of that, you should start improving your credit score.
We hope these insights will help you!
Eve Anderson is a marketing specialist turned blogger. Interested in sports and exciting travel destinations. Love to share content that can inform people.