- Getting Loans. Lenders typically consider a company’s business credit score when deciding whether to approve a loan application. The score may also affect the loan interest rate.
- Obtaining favorable payment terms. Suppliers may offer better payment terms to companies with higher business credit scores.
- Winning new business. Companies may consider business credit scores when assessing whether to use a small business as a supplier.1
So it’s important to make sure not only to establish business credit but also to monitor it regularly and take steps to improve it if necessary.
How to Improve a Business Credit Score
To improve a business credit score, business credit-rating agencies and other experts recommend the following:
- Understand business credit scores, especially how they differ from personal credit scores and what factors influence them;
- Monitor the company’s business credit score, and act quickly to ensure that the information is always maintained up-to-date;
- Use more, not fewer, suppliers, as long as it makes sense for the business, and maintain every supplier account in good standing;
- Pay bills on time – or even a bit early; and
- Keep credit utilization low.
The rest of this article explores each of these five points more deeply.
Business Credit Scores and the Factors that Influence Them
Business credit scores are distinct from personal credit scores. Personal credit scores are based on an individual’s financial history; as might be expected, business credit scores are generally based on a business entity’s financial history – but go further.
Two of the most widely used business credit scores are Dun & Bradstreet’s Paydex and Fair Isaac Corp.’s Small Business Scoring Service (FICO SBSS). Experian and Equifax, which are best known as consumer credit rating agencies, also provide business credit scores.
Even though each credit-rating company uses its own scoring model, a number of common factors influence business credit scores. Some of these are similar to the factors that determine personal credit scores, such as payment history, length of credit history, the level of debt and credit utilization, and public records such as bankruptcies or liens. Other factors, such as company size as well as industry risk, are unique to business credit scores.2
Even though some rating agencies consider business and personal credit scores as separate, experts say it can be important for a small business owner to maintain good personal credit as well as building strong business credit.3 FICO SBSS, for example, takes into account personal as well as business financial history.4 In addition, creditors may review personal credit history in cases where a new business hasn’t yet developed a robust business credit profile.5
There are several approaches for how to build business credit, according to experts.
Monitor Business Credit Score and Keep the Data Current
A good first step is to check the current business credit score. Some experts suggest doing this several times a year. Although some information may be available free, it is often necessary to pay to get full credit reports.6 It’s important to immediately address any inaccuracies, such as a bank’s mistakes or other false activity; some credit agencies provide online tools designed to make it easier to do so. The quickest way to improve bad credit is to pay off debts, according to Dun & Bradstreet; decreasing the balance on business credit cards can have an immediate impact.7
Updating the business profile can also improve business credit scores. Some credit managers prefer reports containing abundant supporting information that helps them assess risk based on a broader view of the business. Therefore, it’s important to update company information that may appear on business credit reports, such as the number of years the company has been in business, number of employees, and gross annual revenues.8
Add Trade Supplier Relationships
Maintaining supplier accounts in good standing is a key factor in building credit. Experts advise opening accounts with multiple suppliers; several supplier accounts may be needed to generate a business credit score. It’s also important to check that all these relationships are shown in the company’s business credit report.9
Experts say that some suppliers may already be reporting a company’s payment activity, even if it’s not obvious; large office-supplies retailers and payroll services providers often report this information to one or more credit agencies.10,11 Experts say if you have a generally positive credit history with a business credit card, don't close the account.12
Pay on Time – or Even Better, Pay Early
Paying on time is the most direct way to drive a positive credit rating, according to Dun & Bradstreet. Therefore, it is vital to ensure that the business pays its bills within the terms defined by providers, whether those terms specify 30 days or 60 days. “If you're trying to improve cash flow by paying your suppliers late, your Paydex number will be significantly affected," according to one expert.13
Even better business credit scores can be achieved by paying early. For example, a business that consistently pays its suppliers on time may get a good Paydex score of 80 (out of 100) – but to get a perfect score of 100 it must pay an average of 30 days early, experts say.14,15
Keep Credit Utilization Low
Just as with a personal credit score, a business credit score depends in part on credit utilization – the amount of credit that is actually being used, compared with the total amount available. Lenders view a business with a high credit utilization rate as a greater risk of being unable to repay its debts; conversely, a low credit utilization ratio may increase a lender’s willingness to extend credit because there is less risk.16
To improve the business credit score, it’s advisable to maintain a relatively low balance on credit cards and other credit lines: Experian recommends keeping the balance at 20 to 30 percent of the limit.17
Another way to help maintain a low credit utilization ratio may be to request higher credit limits; a balance of $10,000 owed against a $12,000 line of credit can lead to a lower score than the same $10,000 balance on a $20,000 line of credit, according to one expert.18
More broadly, the extent of a company’s debt is an important determinant of creditworthiness, according to Dun & Bradstreet. If other companies see a lot of debt on a company’s balance sheet, they are less likely to extend credit due to the greater risk of default.19
