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A business credit score is similar to your personal credit score in that it serves as a key indicator of your business’s financial health and reliability as a borrower to repay. Like your personal credit, it should be something you prioritize, monitor regularly, and leverage to help ensure the best possible financial performance and opportunities for your small business. From the amount of credit that suppliers will extend you to your ability to secure loans in general (as well as the interest rates you will pay on said loans), your business credit score can have a big impact on your financing efforts.
Why is your business credit score a deciding factor for so many different financial transactions? Well, though no measurement is perfect, a strong business credit score paints a portrait of creditworthiness. In other words, it indicates a responsible and financially stable business that is likely to pay bills and small business loans back on time. Lenders set rates and terms based on business credit scores, so it’s definitely in your best interest to maintain a healthy one by engaging in behaviors that will add points to your score.
We get that, for many small business owners, raising your credit score can feel like just another thing on top of a huge stack of to-do’s. Plus, knowing that there are three main business credit reporting agencies (Experian, Equifax, and Dun & Bradstreet) can feel a bit overwhelming. We’ll get into a brief introduction to each score’s key factors, and then follow it up with a consolidated list of tips to raise all your business credit profiles simultaneously.
But First: How to Get Set Up to Start Building Business Credit
Before you can start improving your business credit score, you need to make sure that your business is set up to have one. Make sure that your business is registered and that you have an Employer Identification number (EIN) (request this directly from the IRS). Just like your personal credit score is tied to your Social Security Number (SSN), your business credit score is tied to your EIN.
Unlike personal credit scoring, business credit scores vary a bit more between the credit bureaus. The three major business credit bureaus are Dun & Bradstreet, Experian, and Equifax. FICO also supplies a business credit score, as do alternative reporting companies, such as Tillful (we provide an alternative business credit score). To have a credit score with Dun & Bradstreet, you will need to request a DUNS number.
The next step in getting set up is that you’ll need to make sure any vendors or suppliers that you’re on payment terms with (such as Net-30) are reporting to the business credit bureaus, and if they are, which ones they’re reporting to. That will tell you which bureaus you have documented credit history with. Do note that some lenders report to the Small Business Financial Exchange, which then reports to all the major credit bureaus. Many business credit cards and lines of credit follow that model, which is why they can be an attractive way to build business credit quickly and with little hassle.
Main Factors in the Experian Business Credit Score
According to Experian’s website, they take at least six factors into account when calculating their business credit rating. These include (but are not limited to):
- The frequency and amount of collections, judgments, liens, and bankruptcies (taken from public records).
- Timely payments and payment speed (how many days it takes to pay your creditors)
- Number of hard inquiries, where having more decreases your score
- Number of tradelines, balances outstanding, payment habits, credit utilization, as well as usage trends over time
- Your time in business (which also ladders up to your business credit history) and the size of your business
The main factors that are in your control are paying your bills on time, keeping hard inquiries (ie, new credit applications) to a minimum, credit utilization, and credit mix. Credit mix refers to which kinds of tradelines you have open. These can include financial tradelines (like credit cards), supplier tradelines, and more.
Main Factors in the Equifax Business Credit Report
Equifax’s business credit report contains a few different scores, including a Credit Risk Score, Payment Index, and Business Failure Score. In addition to these sliding scales, the credit file has a detailed view of all derogatory marks, public records, payment history, and outstanding credit lines and tradelines (which Equifax refers to as accounts).
Equifax mainly takes into account payment history, credit history, and credit utilization (which includes available credit). Be sure to fulfill all your financial obligations within the payment terms outlined in your agreement with your lender, creditor, or supplier. Also keep in mind that credit history is big here – if you have an old business credit card, it’s probably best to keep it open, even if you aren’t using it. Also try to keep your credit utilization low — 30% and below is a good rule of thumb.
Main Factors in the Dun & Bradstreet Business Credit Scores
Dun & Bradstreet has four types of business credit scores. Of the three major credit bureaus, D&B is probably the least transparent about the factors that go into their scores. Even so, we can deduce certain things based on what information is available. Small businesses can monitor all four for free using D&B’s CreditSignal service.
Overall, Dun & Bradstreet indexes heavily on payment history and financial profile (including working capital, available assets, etc.) when calculating their business credit scores. To raise your business credit score, consider focusing mainly on their Paydex score, as how quickly you pay your bills is most within your control. Following sound financial practices is also a good move, as this will not only help you ensure longevity of your business, but improve your overall risk profile with Dun and Bradstreet.
Tillful Business Credit Score
The Tillful Business Credit Score is based on real-time transaction data from bank and credit card accounts (that you connect). The more accounts that you connect, the more accurate your score. Keep in mind that you should connect a business bank account (not a personal one) to get your business credit score.
In addition to traditional factors, such as payment history, Tillful looks at cash flow patterns, which include:
- Increasing or decreasing trend in your cash balance
- Irregularities in inflow and outflow
- Credit utilization trends
- Usage of overdraft facilities
- Payment delinquency
- And other factors
The Tillful Score is mainly based on your transactions and cash flow patterns. The best way to raise your Tillful Score is to focus on sound business and cash flow management practices that allow you to make consistent deposits every month, to pay off your financial obligations, to avoid overdrafts, and to maintain responsible financial habits over time. Because the Tillful Score takes into account all your transactions (not just those that report), it’s more important to maintain consistent payment habits (not just good habits on accounts that report).
Consolidated General Tips For Improving Your Business Credit Score
Though every small business credit score weighs different factors more heavily than others, there are general habits that you can focus on that should raise your score across all the bureaus. Here are our consolidated tips for raising your business credit score.
Tip 1: Check Your Business Credit Score Monthly
Peeling back the curtain is a crucial first step. You can pay to obtain your business credit score from the business credit reporting companies (unfortunately, unlike consumer credit scores, these are not free). Once they produce your report, you’ll be able to determine what you need to do next to raise it and make your score work for you.
Regularly requesting a business credit report will also help you stay on top of things and keep an eye out for any discrepancies. Make sure that you do report any errors that you may catch, as getting those removed is an easy way to raise your score.
Tip 2: Make Sure Your Vendors Are Reporting
Keep in mind that credit agencies cannot establish your business credit for you. To do so, you’ll need to work with vendors that report your payment history to the agencies. A positive payment relationship with your vendors reflects well on your business credit score. The more positive payment experiences you have on file, the better.
Vendors can include suppliers, wholesalers, manufacturers' banks, leasing companies, and other financial institutions. However, they are not required to report to credit bureaus. So you may have to either be choosy and only open accounts with vendors that do report, or request that your existing vendors do so.
Tip 3: Pay Your Vendors and Bills Early (and Set Alerts if You Need to)
Paying early is better for your score than paying on time if you have the financial capacity to do so. According to industry stakeholders, paying your vendors and bills early can push payment history scores even higher than they would be if you were merely paying on time. On the Dun & Bradstreet PAYDEX score, paying on time can get you a score of 80, but paying early could get you to 100.
Whatever you do, avoid paying late or allowing your accounts to become delinquent at all costs. Late payments could indicate that your business has financial problems and therefore damage your score. A couple easy ways to make sure you pay early or on time are to set alerts and/or to set up automatic payments (if possible).
Tip 4: Apply For a Business Credit Card
Having a business credit card is a great way to start establishing business credit, as well as to begin keeping your personal and business expenses separate. Most business credit cards report to all the major bureaus, making them one of the easiest ways to start building credit. Be sure to spend within your business’s means, to keep your credit utilization ratio low (below 30% is recommended), and pay your statements early or on time. A secured business credit card is a great way to begin building business credit and can often help you build it faster if you are having trouble getting approved for non-secured business credit cards or lines of credit. Secured card options are great for new small business owners just getting started and these kinds of cards can help you adopt responsible business spending habits from the very early years of investing in your business, since they require a deposit to be used as your business credit line and report your payment and balance history to the three major credit reporting agencies to help you establish a business credit profile separate from your personal credit.
Tip 5: Keep Your Credit Utilization Low
As previously stated, keeping your credit utilization in the sub-30% range can have a positive impact on your business credit score. You can lower your credit utilization in two ways — either by decreasing how many expenses you put on credit, or by raising your available credit. To do so, you can open new tradelines or contact your credit card provider to ask them to raise your credit limit. The latter can be a good option if your revenue has increased since you applied for your business credit card.
Tip 6: Don’t Borrow More Than You Can Afford
Across all the credit bureaus, liens, bankruptcies, and other negative judgments serve as red flags that can bring down your business credit score. Though business is inherently risky, especially when you’re first starting out, there are ways to try and avoid these derogatory marks. The main way is by making sure that you don’t borrow more than you believe you can reasonably pay back. Though many lenders will assess your credit risk before extending you funding, it’s still possible that they will extend you more than you can afford.
Do your own research and calculations before taking out funding for your small business. It’s better to take out a little less, and then take another round of funding out later, than to take out an amount that may be a stretch and end up with a lien (or worse) on your credit report.
Tip 7: Keep Hard Inquiries to a Minimum
It’s important that you apply for an use credit in order to build credit. However, be careful about applying for too many credit cards, loans, or other funding that require hard inquiries. Businesses that apply for multiple credit cards (for example) in a short amount of time may seem like they’re struggling to secure funding, which in turn negatively impacts their scores. Asking for quotes or pre-approvals based on soft credit pulls to compare your options before completing your application(s) is a safer alternative. (PS - this second method is what our partner funding advisors do for you if you go through Tillful Funding).
Bonus: Raise Your Personal Credit Score
When you’re first starting out in your small business, it’s likely that you’ll have to back yourself up with a personal guarantee when applying for funding and credit. Because of this, lenders may ask for your personal credit score (usually your FICO score), and look at your personal credit history to use as a qualifying factor. A good score could land you more favorable terms or lower interest rates. As such, it’s important to stay on top of your personal credit too. Here are some tips for keeping your personal credit score in order.
- Check your credit score regularly
- Make timely bill payments
- Dispute any inquiries and errors as soon as they happen
- Avoid applying for loans or new credit cards frequently
- Keep your credit utilization ratio to 30% or lower
Last Word on Increasing Your Business Credit Score
A good business credit score is something that you need to nurture for the long haul. Credit history takes a while to build up, as does your business’s net worth and positive payment patterns over time. Instead of focusing on all the factors, start with making it a habit to pay your bills on time (or early) and keeping your credit utilization within the 30% range. Also try making a list of vendors that you have a good relationship with, and reaching out to them to ask if they could report on your behalf. By starting with these tiny steps, you’ll be well on your way to building your company's credit.
